The U.S. REIT market is riding high on a wave of incredible two-year growth after the financial crisis. The Vanguard REIT Index ETF was up a jaw-dropping 132% for the two years ending July 9. So it would stand to reason that global REITs (including the U.S.) would also be surging. The SPDR Dow Jones Global Real Estate index (RWO) was up nearly 25% for the two years ending in early July, running almost neck and neck with the S&P 500.

Part of that surge is the rocket-launch-perfect conditions. As the global economy has come back up from its horrible 2009 plunge, rising rents in supply-constricted cities have yielded lots of higher cash flows for REIT investors in many sectors. It's a nice turnaround from three years ago, when REITs found themselves with depreciated assets, too much debt, poorer renters and in turn lower operating cash. Many had to cut their hallowed dividends.

But even though international REITs have performed well, many investors are gun shy. After all, going into the international real estate market means facing a Marco Polo journey through the great and the ruined, the abysmal and the hopeful, the cyclical and the perennially depressed. Europe is suffering from the malaise of debt crises erupting from the countries rimming the Mediterranean. Tokyo and Dubai are choked up with much too much empty office space. Hong Kong is suffering from highly inflated office assets as investors seek in their buildings a kind of CD to park their money amid low interest rates-and rents are just starting to decline there. Australia's economy is in good shape, but some managers insist that Australians are spending their money overseas, which augurs bad signs for retail rent.

Europe is one of the biggest worries. As banks there try to recapitalize, they will likely be lending less, and that spells trouble for capital-intensive businesses like property. Europe's woes-as well as unfamiliar tax landmines and overall herky-jerky price movements-have many investors thinking of a staycation. If that weren't enough, the appreciating dollar cuts a lot of these foreign-currency-denominated investments off at the knees.

The landscape looked dicey enough that it prompted David Blain, president and CIO of D.L. Blain & Co, a wealth manager in New Bern, N.C., to palm off his international REIT exposure last December. And he likes global real estate.

"We reduced our exposure to foreign assets in general," Blain says, "and looking at the strength of some of the U.S. REITs, we just decided to take our whole REIT allocation and stick with the U.S."

"Right now," says Jeanie Wyatt, the CEO and CFO of South Texas Money Management in San Antonio, "we're just much more comfortable having stateside managers that can buy internationally, and I think the place right now to invest is in U.S. REITs." For example, in Europe, she says, "We see huge demand for European real estate REITs. [But] I still think the euro [faces] further declines, further weakness relative to the dollar. Why should we go over there and pay a 25% premium for distressed properties?"

Jim Holtzman, an advisor with Legend Financial Advisors in Pittsburgh, similarly says his firm has no direct exposure to international REITs right now because the central banks are propping up the house of cards that is the European economy. He calls it "central bank risk."

One simple way to cut the Gordian knot is to simply buy American and let domestic REITs do the foreign land buying for you at their leisure. Simon Property Group, for example, recently bought into huge French mall operator Klepierre, which gives the U.S. REIT a huge footprint on the Continent. Taubman Centers, which develops and leases malls, bought a real estate consultancy in China last year and is reportedly closing in on its first mall development there. Industrial REIT Prologis is also expanding in Asia and recently announced it would develop a new e-commerce hub in Japan (the company has 600 million square feet in 22 countries).

"Even though you might be buying a U.S. company, you have to look through what the assets are," says Marc Halle, managing director and head of global real estate securities at Prudential Real Estate Investors. "You might already be getting global exposure and not know."

Get To Know Your Market
Those with boots on the ground, not surprisingly, claim there is lots of opportunity to buy. The key is knowing the markets, says Jason Yablon, a global portfolio manager at New York asset manager Cohen & Steers. For example, peripheral Europe, he says, is performing worse than the U.K., Germany and France. Real estate, the quintessential supply-demand game, has a limited amount of the supply all over the world after the construction largely stopped during the financial crisis (a good thing for investors, since there's no supply competition) but many areas can't hold up the other end of the equation-i.e., the demand part has been weak. In this firmament, high-quality real estate and higher priced assets have trumped lower-end buildings, Yablon says.

"In Europe, the more dominant malls are outperforming the less dominant malls and taking their market share," Yablon says. "Despite some of the macroeconomic troubles that Europe is going through right now, there are still good opportunities to own good, high-quality assets at good prices."

He mentions Simon's new 28% stake in Klepierre, a French retail property company with 271 properties in 13 countries, which it bought in March for $2 billion from the French bank BNP Paribas. Indianapolis-based Simon's deal gave it lots of square footage, but also added to its earnings, got it a 6.5% cap rate and was seen by observers as a play for future deals abroad. And the financing, says Yablon, was efficiently done with equity, which is hard to do in Europe. Simon issued 8.5 million common shares at $137 a share to finance the equity portion of the deal and sold unsecured debt with various maturities of five to 30 years. That was about $1.75 billion in debt issued at 3.4%.

"We like the Simon deal," says Yablon. "We think they're buying a company with operational upside where they can add a lot of value given their expertise. Additionally, they financed it extremely well, so the financing on their debt was under 3.5%. Their earnings will go up because their cost of capital is lower than that of the company that they're acquiring." Simon was also smart because it dipped its toe in the water without betting the whole house, he says, and furthermore, it raised money for the deal in the more efficient U.S. capital market, not in the dyspeptic European ones.

He also likes the deal done by Deutsche Wohnen, a German-listed residential property company, which took German multi-family housing company Baubecon, with 23,500 units, off the hands of Barclays with a mix of debt and equity in a 1.235 billion euro acquisition. Meanwhile, in June, Brookfield Office Properties, though not technically a REIT, announced it was taking a portfolio of office buildings in the London financial district off the hands of Hammerson plc, known more for its retail properties, for $829 million.

Says Philip Martin, a REIT strategist at Morningstar, the good real estate deals will largely come when companies need to scrape property off their balance sheets to rationalize their own books, build their capital or improve their capital ratios. It could be banks like Barclays and BNP, for example, European concerns that need to raise their capital levels to meet stricter rules. Real estate holdings on a bank's balance sheet may be more expensive than they would be on the books of a REIT, which could step in and find (or create) the value.

"Maybe they are European companies that have a lot of exposure to real estate but they are retailers," says Martin. "And these companies have to look at this and say, 'Do we want to own this or monetize some of the real estate assets that they have on the balance sheets?'"

He takes as an example McDonald's, which rumor mongers have hoped for 15 years or so would spin off its vast real estate holdings into a real estate investment trust, a hope the burger empire has often poured cold soda on-even though the wags insist it would boost shareholder value. "Their business is fast food," Martin says. "That's where they excel. But they happen to own that asset on their balance sheet. It's worth a lot of money; maybe they can sell it and take the proceeds and redeploy the proceeds in an effective manner so that McDonald's is more efficient."

For investors to take advantage of these deals, Yablon says, the best strategy is active management. "Internationally there is a wide divergence in the execution abilities and the ability to create value of the different management teams," he says, "so you want to be with the right management team owning the right asset. You don't want to buy a little bit of everything."

Andrew Wood, an executive director at MGPA, an independent private equity real estate advisory company that manages $11 billion in assets in Europe and Asia, says that despite Europe's problems, his firm has found themes there auguring the decent creation of value.

"Europe [is] an unfavorable place to invest in the eyes of the rest of the world, and that statement is the opportunity," because everyone is ignoring it, he says. He extols attractive discount retail real estate deals in Germany. That country has been a nation of savers after surviving its own financial calamity in 2004, and this has been a boon to nondiscretionary spending. Discount retail "is as recession proof as you can get," he says.

Wood says the key in Europe is the arbitrage between yields you can get for secondary properties and core properties. "That is now broadly speaking as wide as it has ever been. It is around 500 basis points and rising." And anything with a whiff of risk gets hugely discounted. MGPA's strategy in Europe, he says, is to "manufacture" core assets-"buy something that is imperfect, manage it, capture some of that arbitrage between the yield." That can mean buying the property cheap from a distressed seller or developing a property no one else can. It might mean raising a new building in the City of London office market where there's huge pent up demand and low vacancy, at a time when building there has otherwise stalled. Or in China, for example, he recalls his firm's efforts to coax the Chinese in one city into a new shopping center's parking garage with free Starbucks drinks.

Then there is oft-abused Japan, "the market everybody loves to hate," according to Wood. This, too, is worth a serious look, he says, in choir with Yablon.

"The market that we like, oddly enough is Tokyo," Wood says. "Japan is out of favor at the moment. You read about the fact that its population is decreasing, its economy is going nowhere etc., etc., etc. Understand that Tokyo is the largest metropolitan area in the world, about 35 million people. It is the largest office market by miles in Asia and I think the second largest to Paris in the whole of the world and the population of Tokyo is actually getting younger and the economy is growing faster than Los Angeles and most other U.S. cities. So what you're seeing in Japan is ever-increasing concentration of economic activity in the metropolitan area of Tokyo, with the result that Tokyo benefits from that and the rest of the country is doing even worse than you thought."

Here the opportunity arises because Tokyo is a relatively inefficient property market, with older buildings to buy, renovate and play around with, and that gives property buyers the chance to, again, "manufacture" core assets, the same as in Europe or China. MGPA had been out of Tokyo but recently closed on a building in the tony Ginza area, Tokyo's version of the Champs-Elysees.

Yablon's view of Tokyo is that the office market has been so bad for so long-at a vacancy rate of 9.2% because of rampant oversupply-that it just can't get much worse. Japan also offers REIT companies a shot at industrial plays, Yablon says, since 2011's vicious tsunami revealed cracks in the country's logistical infrastructure.

A Volatility Approach
Stephen Hammers, CIO of Compass EMP Funds, a Brentwood, Tenn., alternative mutual fund manager, says the volatility in the REIT markets stems from the fact that investors keep changing their minds between hope and fear. He says that in the long term, global REITs are a great place to be, but there must be a way to hedge the downside risk by dollar-cost averaging or by investing with some sort of a stop-loss involved.

Compass's funds have a specific rules-based investment strategy with its own in-house, Dow Jones-listed index that weights REITs based on their risk, (the strategy is interesting in that it doesn't have the usual panoply of familiar REIT names in it). The strategy requires the REITs to make profits for four consecutive quarters. Because of Europe's "irrational price movements" and other currency problems, Compass liquidated its international REIT exposure two years ago and is 100% long in U.S. names.

"Europe should be performing a lot worse than what it is," Hammers says. "It should not be going up. They have some major, major catastrophic crisis that there is no money that can save them. And investors are striving for good news and it's only getting worse. So we're going to wait a while. We do intend to get back in that market and when we do we're going to dollar cost average back in."