Understanding the global real estate game
Wednesday, 27 June 2007
Nicholas Vardy
"Boston is still in the pits... in Florida it's like death takes a holiday... Las Vegas is now terrible... Michigan may [never] come back" is the way Robert Toll, chief executive of Toll Brothers (TOL recently summed up the state of the U.S. housing market. Thanks to a combination of tighter lending standards, higher interest rates, and nervous buyers, much of the U.S. real estate market is in a funk. No wonder U.S.investors are casting their eyes abroad. Investing in real estate once meant owning a rooming house off-campus in Columbus or buying shares in a U.S.-based real estate investment [REIT] trust. Today, it means putting money in an international REIT trading in London -- or even buying a pied-à-terre in Tuscany.
The Global Real Estate Game: Why Play?
Globally, soaring real estate values have generated astonishing wealth. The Economist magazine calculated that the total value of residential property in developed economies has risen by three-quarters between 2000 and 2006 to almost $75 trillion. That's roughly equivalent to the size of their combined GDPs over the same period. Sophisticated U.S. investors are investing in global real estate both as way to profit from emerging economies across the globe, as well as to have the chance to exit the weakening U.S. housing market.
U.S. investors are looking as far afield as Mauritius in their quest to diversify their investments internationally and away from financial assets such as stocks and bonds. Because -- like politics -- all real estate is local, New York or London real estate prices have little effect on prices in Mumbai or the Bulgarian coast. And foreign real estate has little if any correlation with U.S. stock prices. Even mainstream investment advisors are catching on. Ibbotson Associates recommends that foreign real estate should equal about 8% to 9% of an investor's portfolio. Throw in the benefit of having non-dollar assets as a way to hedge against the relentless devaluation of the dollar, and the benefits multiply.
The Global Real Estate Game: The Lay of the Land
Forget Boston, Miami, Las Vegas and D.C. The new global hot spots for home-price growth are Riga, Tallinn and Vilnius. These former outposts of the Soviet Union, the capital cities of Latvia, Estonia and Lithuania boast the fastest-rising housing prices in the world. In a recent survey of 31 global markets by Knight Frank, Latvia ranked #1 among 31 markets with home prices jumping by a whopping 61.2% over the past year. Estonia and Lithuaniarose by a relatively moderate 24.5% and 21.7%. The fastest-growing commercial property market in the world? South Africa, where property prices rose 30.1%.
Bulls point out that prices still lag behind those in much of Western Europeand the United States. Average house prices in major cities in Baltic countries, including Latvia, are around $202,375. This compares with $359,048 in the United Kingdom, and around $315,000 in Germany. At this rate, by the end of this year, average prices in formerly obscure parts of the former Soviet Unionwill exceed the average price of existing homes in the United States ($213,800).
Europe's secondary markets are among the hottest property markets on the globe. As little as two years ago, more than half of all European real-estate investments were concentrated in the 10 largest markets, including London and Paris. By last year, that figure fell to one-third. Last year, about 34% of the $17 billion in real-estate deals in Central and Eastern Europe targeted smaller cities. This year, that figure is expected to jump to $20 billion. Second-tier office space in places like Izmir, Turkey, are yielding around 10% to 11% compared to less than half of that in traditional European capitals. Other hot spots that will challenge the ken of the most experienced Jeopardy contestant include Katowice, Poland, Volgograd, Russia, and Bucharest, Romania. Last week, I attended a presentation in London on a new real estate fund focusing on the Ukraine. With just $200 million in real-estate deals last year, Ukraine is still largely untapped as an institutional-investment market. How much money is to be made by investing where others fear to tread? The managers require that each investment have an internal rate of return of at least 35%. Even Africa -- a no-go area for most international property investors -- is attracting investments, including a new $100 million fund focused on less developed African countries in western and southern Africa such as Nigeria, Malawi and Mozambique.
The Global Real Estate Game: Playing the Game
The easiest way to invest in global real estate is by buying shares in a mutual fund or an exchange-traded fund. More than a dozen global real-estate mutual funds that have launched in the United States during the past two years now manage some $16.8 billion. International real-estate exchange-traded funds such as WisdomTree International Real Estate and Northern Trust Corporation's Northern Global Real Estate Index are solid bets in the sector.
Some daring Americans are buying properties directly -- in Central America, Bulgaria, and Turkey. Because buying property directly presents numerous logistical challenges, investors work with agencies to locate new properties. The agencies in turn work with local attorneys and hire property management companies.
The Global Real Estate Game: Boom to Bust?
The booming housing markets in the Baltic nations and Bulgaria stand in contrast to slowing home-price growth in the United States and parts of Western Europe. The Spanish and Irish markets are teetering. In Switzerland, Germanyand Sweden, prices have fallen in the past year by 3.9%, 1.5% and 0.3%, respectively. Germany's housing market has been a huge disappointment to contrarian real estate investors, including a number of U.S. private equity firms that bought up a large chunk of the city of Dresden's municipal housing stock. House prices in Japan have fallen by 1.5% in the past year, although there are signs that the market is starting to rebound after a prolonged stagnation.
Playing the global real estate game isn't for everybody. Not all markets are booming, and dangers of a collapse always lurk. Only one thing is certain: real estate investing is now a global game.
........................................
http://seekingalpha.com
"Boston is still in the pits... in Florida it's like death takes a holiday... Las Vegas is now terrible... Michigan may [never] come back" is the way Robert Toll, chief executive of Toll Brothers (TOL recently summed up the state of the U.S. housing market. Thanks to a combination of tighter lending standards, higher interest rates, and nervous buyers, much of the U.S. real estate market is in a funk. No wonder U.S.investors are casting their eyes abroad. Investing in real estate once meant owning a rooming house off-campus in Columbus or buying shares in a U.S.-based real estate investment [REIT] trust. Today, it means putting money in an international REIT trading in London -- or even buying a pied-à-terre in Tuscany.
The Global Real Estate Game: Why Play?
Globally, soaring real estate values have generated astonishing wealth. The Economist magazine calculated that the total value of residential property in developed economies has risen by three-quarters between 2000 and 2006 to almost $75 trillion. That's roughly equivalent to the size of their combined GDPs over the same period. Sophisticated U.S. investors are investing in global real estate both as way to profit from emerging economies across the globe, as well as to have the chance to exit the weakening U.S. housing market.
U.S. investors are looking as far afield as Mauritius in their quest to diversify their investments internationally and away from financial assets such as stocks and bonds. Because -- like politics -- all real estate is local, New York or London real estate prices have little effect on prices in Mumbai or the Bulgarian coast. And foreign real estate has little if any correlation with U.S. stock prices. Even mainstream investment advisors are catching on. Ibbotson Associates recommends that foreign real estate should equal about 8% to 9% of an investor's portfolio. Throw in the benefit of having non-dollar assets as a way to hedge against the relentless devaluation of the dollar, and the benefits multiply.
The Global Real Estate Game: The Lay of the Land
Forget Boston, Miami, Las Vegas and D.C. The new global hot spots for home-price growth are Riga, Tallinn and Vilnius. These former outposts of the Soviet Union, the capital cities of Latvia, Estonia and Lithuania boast the fastest-rising housing prices in the world. In a recent survey of 31 global markets by Knight Frank, Latvia ranked #1 among 31 markets with home prices jumping by a whopping 61.2% over the past year. Estonia and Lithuaniarose by a relatively moderate 24.5% and 21.7%. The fastest-growing commercial property market in the world? South Africa, where property prices rose 30.1%.
Bulls point out that prices still lag behind those in much of Western Europeand the United States. Average house prices in major cities in Baltic countries, including Latvia, are around $202,375. This compares with $359,048 in the United Kingdom, and around $315,000 in Germany. At this rate, by the end of this year, average prices in formerly obscure parts of the former Soviet Unionwill exceed the average price of existing homes in the United States ($213,800).
Europe's secondary markets are among the hottest property markets on the globe. As little as two years ago, more than half of all European real-estate investments were concentrated in the 10 largest markets, including London and Paris. By last year, that figure fell to one-third. Last year, about 34% of the $17 billion in real-estate deals in Central and Eastern Europe targeted smaller cities. This year, that figure is expected to jump to $20 billion. Second-tier office space in places like Izmir, Turkey, are yielding around 10% to 11% compared to less than half of that in traditional European capitals. Other hot spots that will challenge the ken of the most experienced Jeopardy contestant include Katowice, Poland, Volgograd, Russia, and Bucharest, Romania. Last week, I attended a presentation in London on a new real estate fund focusing on the Ukraine. With just $200 million in real-estate deals last year, Ukraine is still largely untapped as an institutional-investment market. How much money is to be made by investing where others fear to tread? The managers require that each investment have an internal rate of return of at least 35%. Even Africa -- a no-go area for most international property investors -- is attracting investments, including a new $100 million fund focused on less developed African countries in western and southern Africa such as Nigeria, Malawi and Mozambique.
The Global Real Estate Game: Playing the Game
The easiest way to invest in global real estate is by buying shares in a mutual fund or an exchange-traded fund. More than a dozen global real-estate mutual funds that have launched in the United States during the past two years now manage some $16.8 billion. International real-estate exchange-traded funds such as WisdomTree International Real Estate and Northern Trust Corporation's Northern Global Real Estate Index are solid bets in the sector.
Some daring Americans are buying properties directly -- in Central America, Bulgaria, and Turkey. Because buying property directly presents numerous logistical challenges, investors work with agencies to locate new properties. The agencies in turn work with local attorneys and hire property management companies.
The Global Real Estate Game: Boom to Bust?
The booming housing markets in the Baltic nations and Bulgaria stand in contrast to slowing home-price growth in the United States and parts of Western Europe. The Spanish and Irish markets are teetering. In Switzerland, Germanyand Sweden, prices have fallen in the past year by 3.9%, 1.5% and 0.3%, respectively. Germany's housing market has been a huge disappointment to contrarian real estate investors, including a number of U.S. private equity firms that bought up a large chunk of the city of Dresden's municipal housing stock. House prices in Japan have fallen by 1.5% in the past year, although there are signs that the market is starting to rebound after a prolonged stagnation.
Playing the global real estate game isn't for everybody. Not all markets are booming, and dangers of a collapse always lurk. Only one thing is certain: real estate investing is now a global game.
........................................
http://seekingalpha.com