Are the Best Real Estate Investments Overseas?

by 29 Apr 2013

With the housing market having paced a remarkable recovery in the past two quarters, domestic property investments have seemed like increasingly appealing portfolio entries. As I’d noted in a prior post, certain segments of America’s urban property have displayed such positive value growth potential that they’ve attracted aggressive investment from foreign wealth managers. Commercial property in economically stalwart metros such as Washington, DC and Houston has garnered investment from both Canadian and Swedish financial powerhouses. However, international market trends suggest that foreign property holdings may have greater shirt-term value returns than domestic holdings.

According to a new report from Reuters, Americans are increasingly investing in funds that hold outstanding stakes in overseas property. Emerging market or traditional BRIC investment has always been a riskier allocation, as their still-developing sectors leave room for both enormous returns as well as cataclysmic loss. However, the national attitude seems to have shifted some, with a greater volume of Americans putting their investment dollar in projects and funds with a particular focus on overseas commercial property. As the Reuters disclosure specifies, Americans allocated a full $2.6 billion into mutual funds and exchange-traded funds that invested in overseas property.

This is a curious inversion of the trends that emerged throughout Q4 2012, whereby foreign fund management bodies began to move towards investing in promising American commercial property. All things considered, it seems that as of last quarter the strongest segment of the American real estate sector lied in residential property above commercial offerings. The Reuters report notes that American interest in overseas property had begun to simmer last year, with the total number of property investments held by Americans increasing by a valuation of approximately $5.91 billion. However, the rise in total capital that Americans allocated to overseas holdings in the past quarter represents an exceptional escalation.

To parse the finer investment specifics, the overwhelming amount of these investments is spread among office complexes and hotels, along with certain other miscellaneous commercial property. As the Reuters story discloses, much of these investments are being allocated in direct real estate investments and non-securitized loans. The BRIC standard of nationally defined overseas interest persists somewhat, with Brazil, China, and India remaining as popular destinations for U.S. fund management allocation. East Asia has become a particularly sought-after location for commercial property investments, with the interest in Chinese commercial property rising in tandem with analyst predictions around economic growth.

So, what’s the takeaway for investors? Anticipation (warranted or otherwise) around the allegedly vast growth margins of BRIC-oriented funds has been an investing mainstay for well through the past decade. These funds have a tendency to be as volatile as they countries in which they’re focused, and the same could well hold true for newly minted real estate funds. The crucial means of determining the stability and growth potential of a foreign real estate fund would seem to lie in examining the economic fundamentals of the sectors and regions to which it is directly tied. Diligent analysis around the job growth or industry stability of a particular region will go a long way towards determining the long-term viability of provincially-associated funds.




Is TILA-RESPA a good or bad thing long term?