Finding Fertile Ground Overseas
In pursuit of higher returns and lower overall risk, savvy investors seek out alternatives such as commodity or real estate funds. Besides their profit potential, alternatives are prized because they don't generally behave like stocks and bonds. Now a small but growing number of mutual funds are making a new flavor of alternative investment available to individuals -- international real estate. It's not a must-have for every portfolio. But if you want to be as diversified as possible, it makes sense to spread your real estate exposure around the globe.
Recently, such powerhouses as Fidelity Investments and real estate specialist Cohen & Steers (CNS ) have launched funds that zoom in on overseas holdings. They join the Alpine International Real Estate Equity Fund, which has been investing abroad for more than 15 years. The fund companies are betting that individuals, who increasingly view real estate as a core investment, will see overseas funds as a hedge against any downturn at home. Over the past decade, real estate stocks in different countries have moved in tandem with the global market for listed real estate securities just 40% of the time, vs. an 80% correlation for the global stock and bond markets, says Scott Crowe, a global strategist at UBS (UBS ). "Local factors drive the real estate markets."
Although foreign properties are not, on the whole, cheaper than their U.S. counterparts, fund managers see good growth prospects abroad. Steve Buller, manager of the Fidelity International Real Estate Fund, sees potential annual returns for international property stocks of 7% to 10% over the next decade.
James Corl, Cohen & Steers's chief investment officer for real estate securities, thinks there are opportunities in such countries as Japan and Germany, where banks, utilities, and other conglomerates are divesting properties unrelated to their main businesses. "A lot of that is likely to get picked up by firms that specialize in real estate," says Corl, whose fund's top picks include Mitsubishi Estate, Japan's largest real estate company.
Some think there's more upside for property markets overseas. Since the U.S. led the world out of the 2001 recession, notes Alpine's Sam Lieber, "other economies' business cycles have more room to run."
One difference between domestic and foreign real estate funds is the yield they offer. U.S. funds hold mainly real estate investment trusts, which avoid corporate taxes by passing along big dividends to investors. But REITs are new in some countries and don't exist in others. As a result, in many overseas markets, real estate is held mainly by operating companies, which make lower payouts. Still, with more countries recently allowing REIT-like structures, foreign REITs are likely to become more prevalent.
The funds are not making big bets on single countries. For example, the Cohen & Steers International Realty Fund has 20% of its assets in Britain, 15% in Hong Kong, 13% in Australia, and 10% in Japan. Top holdings are Land Securities, a British office and retail property owner, and Westfield Group, an Australian mall owner that's expanding in Europe. Alpine favors J.M., a large Swedish developer, and Spanish builder Fadesa Inmobiliaria.
To replicate the global market, you'd have to devote about half of your real estate allocation to international holdings. But given the risks in foreign investments -- notably, currency fluctuations -- some investors might opt for less. Still, even a little exposure to this diversifying asset should help cushion your returns over time.
By Anne Tergesen