Our post on Sunday on Coldwell Banker’s survey of what the well-to-do American thinks about the housing market was more in tune with the spirit of the times than we realised at the time of writing: the Wall Street Journal Online had already published Jeff D. Opdyke’s article – ‘Real Estate Investors Are Heading Overseas‘. Opdyke focuses on the growing trend towards property investments (direct and through funds) abroad but there do not yet appear to be hard statistics on what proportion of US real estate investments are going outside the country.
Factors favouring overseas property investments are the weakening of the housing market in the US and the weakness of the dollar. Foreign real estate can be a hedge against both these trends Last week we commented on the likelihood that exchange rate factors contributed to the success of Morgan Stanley’s MSREF VI fund. For private investors with experience of profiting through property in the US, foreign property can represent a relatively straightforward transference of their investment skills.
Opdyke points out that foreign real estate investment carries risks for Americans, not least the possibility of a recovery in the value of the dollar. However, that would appear to be a danger a year or two ahead. Possibly a further risk for the unwary is stumbling into markets whose upside has been fully or largely anticipated by European investors. The Wall Street Journal article instances a couple investing in a property at a new ski resort in Bulgaria’s Pirin Mountains, giving the impression that the country is undiscovered by Western Europeans. Likewise, Mauritius is described as ‘obscure’ but tourist visits are currently heading towards a million people a year.
In evidence of growing interest in foreign property investment the Journal instances over 20 global real estate mutual funds that have launched in the US in the last couple of years. The total holdings in this type of investment is now standing at $16.8bn. The American Stock Exchange now lists two international exchange traded funds (ETFs) but bear in mind that at the end of 2006 there were several hundred ETFs available.
The second such fund is the Wisdom Tree International Real Estate fund. The first such ETF was DJ Wilshire International Real Estate ETF which has already grown to $1bn. According to the Seeking Alpha the funds are investing in companies whose chief targets are the property markets in Australia, Japan, the UK, Hong Kong, Singapore and France.
Opdyke also reports on Northern Trust Corporation’s one-year-old Northern Global Real Estate Index fund. This fund tracks the FTSE EPRA/NAREIT Global Real Estate Index. Note that in this context ‘Global’ includes US holdings as opposed to the epithet ‘international’ which excludes them. Northern Global Real Estate is 40% weighted to US investments.
From an international perspective one of the key concerns will be the effect of US investors piling into overseas real estate on the individual overseas markets. All property investors need to have a better idea of the scale of potential American investment and the markets that the extra cash is headed for ‘the boat will rock when the big guy comes aboard. In general US interest in foreign property probably means real estate coming a step closer to a commodity; in particular smaller markets (India, Thailand, Malaysia for instance) the potential scale of American investment inflows could exacerbate property price bubbles.
Opdyke quotes Charles Schwab’s recommendation that overseas real estate should receive an asset allocation of 3 to 5%. If you have differing views on this topic, we would love to hear from you and this may be a subject we could give more attention to later in the year.
If you’re a US investor considering investing in overseas real estate directly, you may be interested to know that beginning next week Overseas Property Mall will be posting a series of Country ‘how to’ Guides, getting down to ‘brass tacks’ on specific locations such as Mexico and Greece.