Investing in commercial real estate abroad is becoming easier. Impressed with its strong returns and looking to diversify client portfolios, more advisors undoubtedly have added U.S. commercial real estate to their investment mix. Add to that all the attention being given to growing business opportunities in foreign markets, and an advisor may wonder if it's time to go global with real estate.
Indeed, international commercial real estate may be another way to diversity portfolios, and it certainly has provided handsome returns. If the dollar continues to fall, as some analysts believe, that could contribute to a further rise in the value of foreign real estate. According to the National Association of Real Estate Investment Trusts, in 2004 the EPRA/NAREIT Global Real Estate Total Return Index rose almost 38%. Over the last five years, its compound annual total return was 16.8%. (EPRA is the acronym for the European Public Real Estate Association.) The 2004 total return for the global index, not including North American companies, was 43.4% (52.7% for Europe, 36.8% for Asia).
Those numbers compare with a 30.4% return in 2004 for the NAREIT Composite Index of publicly traded U.S. REITs. Over the last five years, the U.S. index has produced a compound annual total return of 22.5%.
"Look back in time and you'll discover that real estate stocks have outperformed the S&P 500, the Dow Jones Industrial Average and the Nasdaq on a compound annual total return basis over the past 30 years," says NAREIT Senior Vice President of Research and Investment Affairs Michael R. Grupe. "Any investment sector may outperform or underperform other sectors over short periods of a few years, but REITs' long-term record of high total returns, reliable stock dividends and low correlation create critical diversification benefits that make REIT stocks a necessary element of any balanced portfolio."
The choices for putting money into commercial real estate abroad are more limited than in the United States, but new options should be available in the coming years as countries continue to create REIT-like structures. REITs will broaden the shareholder base in global real estate and make it easier for smaller players to invest, observers say.
Before looking at the current options for investing, let's get a sense of the global commercial real estate market. A December 2004 report by UBS Investment Research estimates $5.95 trillion in commercial real estate is held worldwide in both the private and public markets for investment purposes (See Table 1). The report estimates that the United States has 42% of that total, but only 12% of U.S. commercial real estate is securitized.
Although the United States has by far the largest commercial real estate market in the world, most properties are owned directly or by private companies, notes NAREIT's Grupe. NAREIT estimates REITS own only about 15% of U.S. commercial properties, and Grupe expects that percentage to grow slowly but steadily to between 30% and 50% over the next 15 years.
Although commercial property markets are much smaller in other countries, some are more securitized than in the United States. For example, UBS estimates the United Kingdom has 8% of the global investable real estate universe, but 17% of its market is securitized. Australia has only 2% of the total, but 52% of its market is securitized.
Scott Crowe, director and global real estate strategist for UBS Investment Research, says the number of publicly traded, or listed, real estate firms worldwide is growing and their market capitalization should double to about $1 trillion by the end of the decade. When looking at the listed real estate universe, Crowe says, companies fall into two categories: developers and investors.
Developers, firms that create real estate product and sell it, account for about 16% of total market capitalization, the UBS report says. One of the largest companies in this category is Hong Kong's Sun Hung Kai P., a residential developer with a market cap in U.S. dollars of more than $24 billion in December. Others include Singapore-based City Developments Ltd., an international property and hotel conglomerate operating in 21 countries, and Mitsubishi Estate Co., one of Japan's largest real estate firms.