Real Estate Has More Appeal Outside the U.S

Nov. 21 (Bloomberg) -- For real estate investors, global markets look brighter than those in the U.S. today. International property prices caught fire three or four years ago, at a time when it wasn't easy for individuals to buy in. Today you can. There are at least 16 retail mutual funds and three exchange-traded funds (ETFs) trained mainly on Europe, Asia and Latin America. Some of them include U.S. properties, others don't.

In the U.S., the funds own shares principally in real estate investment trusts, or REITs, especially equity REITs that operate various types of commercial property -- office buildings, hotels, malls, apartment houses, industrial warehouses and so on. REITs or REIT-like structures are now developing in other countries, too, including Australia, Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, Netherlands, Singapore and the U.K. Where REITs don't exist, the funds buy shares of operating real estate companies.

As diversifiers, REITs and real-estate companies land somewhere between bonds and stocks, providing steady rental income combined with capital gains if the properties rise in value. Often, real estate does well when other parts of the market sag.

Global diversification lowers your risk even more, by exposing you to more than one interest-rate or real-estate cycle. While the U.S. office market appears to be going soft, booming global trade is driving up property prices in international port cities and financial centers.

Broader Market

Private equity is there already. So far this year, 101 real-estate funds have raised $63.9 billion, according to London-based Preqin, a private-equity consultant. Less than half of that money went into the U.S. The rest was divided roughly equally between Europe and the rest of the world.

Internationally, the groundwork is being laid for a much broader, publicly traded property market, says Samuel Lieber, head of the Alpine International Real Estate Equity Fund. ``In 1989, we were hard pressed to invest in 16 countries,'' he says. ``Now we're invested in 28 and looking to invest in 35.''

Lieber singles out Brazil as ``potentially the most interesting market in the world.'' It's newly developing a public real estate market, 30-year mortgages are now available and demand for real estate is strong.

Cohen & Steers, a long-time real-estate specialist, currently offers three funds -- Asia Pacific Realty Shares, International Realty Fund and Global Realty Shares (formerly a U.S. fund that went global in September). Senior Vice President Scott Crowe sees good value in the U.K., a market where real estate stocks trade at substantial discounts. Prices dropped 15 percent (in British pounds) in the first half of 2007, to levels that seem worth buying. He finds prices compelling in continental Europe, too.

Asia Leads

Absolute growth will be higher in Asia, he says, but stock prices are high, too. Roaring growth can't be sustained in those markets if the rest of the world slows down.

Charles Schwab's Global Real Estate Fund launched in May. David Siopack, co-portfolio manager of the fund, says that global investment truly became viable only in the past three years, as more countries developed REIT structures and private operating companies started going public.

Siopack loves Singapore -- a high-growth city state, strategically placed, with the world's busiest port. Its property index jumped 10.2 percent in the second quarter of 2007 while most markets sank. He also likes Hong Kong (up 7.7 percent) and office properties in central Tokyo. Overall, Japanese property prices dropped 6.8 percent in the second quarter, but he sees central Tokyo as ``like midtown Manhattan,'' with rising demand for limited space.

Watch Costs

Looking further afield, he's interested in apartments and office properties in western Canada, where growth is driven by oil-field development.

As usual, you need to watch your expenses when buying a fund. Cohen & Steers is among the priciest, with 1.65 percent in annual costs plus an upfront sales load of 4.5 percent. No-load funds dispense with sales commissions and pare annual costs. For example, Schwab Global Real Estate Fund charges 1.2 percent a year; Alpine costs 1.17 percent; Fidelity International Real Estate costs 0.96 percent.

For the names of more global and international funds, check http://www.investinreits.com .

ETFs include the WisdomTree International Real Estate Fund, and three index funds: Barclays iShares S&P World ex-US Property Index Fund, First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund and State Street's SPDR DJ Wilshire International Real Estate. In this niche, however, managers generally outperform the indexes, according to Mike Kirby, director of research at Green Street Advisors, specialists in REIT consulting.

Taxing Consequences

Your ETF or fund receives dividends from the companies it invests in and passes them on to you. Dividends received from REITs are taxed in your ordinary income bracket. Dividends from other real estate stocks normally get the 15 percent capital- gains rate. Qualified foreign taxes paid are passed through to U.S. investors as tax credits.

U.S. real estate still matters, for its income and relative stability. For investors seeking moderate risk, Ibbotson Associates suggests putting 23.3 percent of your equity into real estate stocks, with the following allocation: 12.1 percent in North America, 7.8 percent in Europe and 3.4 percent in Asia. Raise the Asia percentage, if you're up for higher risks.