The U.S. credit crunch and financial meltdown is pushing a growing number of American real estate companies and investors to look outside the United States for opportunities.
Many fear that the deepening crisis will lead to more layoffs and a sharp pullback in demand for real estate space, causing occupancy, rents and values to tumble.
“The demand for space [in the United States] has deteriorated, and we expect it to get worse,” said Amy Lauren Young, a senior analyst at REITology, part of New York-based StreetBrains LLC. “I do think that rents will come down — it’s kind of inevitable in this kind of market.”
“With the U.S. suffering from both a consumer and financial crisis, we would avoid many U.S. real estate stocks,” she said.
Instead, many U.S. investors, opportunity funds and real estate investment trusts have been scouting for real estate bargains in high-growth areas of the world, where the local economies are growing and demand for real estate is escalating. The most popular targets are in India, China, the so-called Asian Tigers (South Korea, Malaysia and Singapore), the Middle East, Scandinavia and Brazil, Ms. Young said.
She favors “cutting-edge cities,” where gross domestic product growth is high and rural residents are migrating to urban centers in large numbers, creating huge demand for real estate space.
Ms. Young said the percentage of the world population living in cities is expected to grow to 75% by 2025 from 50%. As a result, she thinks that the east Asian Tigers offer strong investment opportunities.
Ms. Young’s top market picks are Seoul, South Korea; Kuala Lumpur, Malaysia; Dubai, United Arab Emirates; and Stockholm, Sweden.
She is also bullish on the residential market in Brazil, where she estimates that there is a housing shortage of 8 million units.
“As people have been growing their income levels, they’re moving to urban markets from the rural communities,” Ms. Young said. “So there’s a need to house these people who are moving into Sao Paulo, Rio [de Janeiro] and other cities like that.”
“India, Russia, Brazil, Mexico and China are growing faster and, therefore, the opportunities for higher returns because of appreciation are much stronger there,” said Ray Torto, global chief economist for CB Richard Ellis, a Los Angeles real estate services company. He noted that GDP growth in the BRIC countries — Brazil, Russia, India and China — is up 6% to 8% so far this year, far surpassing the U.S. annualized GDP growth of 0.6% last quarter.
“The expected returns [on real estate in these areas] are generally in the high-teens to 25% range,” Mr. Ellis said.
Steven Lichtenfeld, co-chairman of the real estate finance/capital markets division at law firm Proskauer Rose’s New York office, said that more private equity funds and REITs have been inquiring about global investment in emerging markets, such as China, India, Eastern Europe, and Central and South America.
“There’s a feeling those markets have the opportunity to generate returns that would exceed what they could realistically achieve in the U.S.,” he said. “People are looking at those economies as growth areas.”
Merrill Lynch & Co. Inc. of New York recently acquired a 20% stake in Belgrade, Serbia-based real estate company MPC Properties, marking its first foray into the country’s real estate sector. The move indicated its confidence in the growth prospects of an underdeveloped country that has a strong local economy.
Several U.S. real estate moguls have disclosed their appetite for global real estate. Sam Zell said at a New York University REIT symposium this month that he sees little opportunity to buy bricks and mortar domestically, but plenty outside the United States.
“We continue to be major players in Brazil, China, Mexico and various other emerging markets on the private side,” he said. “We think there are significant opportunities in that arena.”
Mr. Zell is chairman of several REITs — Equity Residential Properties Trust and Equity Lifestyle Properties Inc., both of Chicago, and Capital Trust Inc. of New York — as well as a number of private investment entities. He is also chairman and chief executive of the Tribune Co. of Chicago.
At the same conference, William Mack, founder and managing partner of New York-based Apollo Real Estate Advisors LP, said he sees opportunity in Russia, Turkey, India and South America, while Hamid Moghadam, chairman and chief executive of AMB Property Corp. in San Francisco, said his industrial REIT has been expanding outside the U.S. borders for years and he sees brisk demand for industrial space in Mexico and Canada.
“The overall picture outside the U.S. is stronger than in the U.S.,” Mr. Moghadam said.
A growing number of REITs, including Simon Property Group Inc. of Indianapolis, Kimco Realty Corp. of New Hyde Park, N.Y. and ProLogis of Denver have been buying or developing properties in high-growth markets outside the United States.
Ms. Young cautions investors to avoid world financial centers, such as London and Tokyo. “Capital markets are interconnected,” so these locations face the same financial market turmoil and potential falling rents and property values as the United States does, she said.
Investing in global markets isn’t without risk. Investors often have a tough time getting data to assess individual properties and many face a myriad of murky tax laws, government regulations and political instability in some regions.
Russia is seen as the most risky for disclosure and other issues. This makes it necessary for investors to team up with local real estate partners to navigate through the process.
“Most look to joint-venture with a local partner,” Mr. Lichtenfeld said.
Some investors are snapping up foreign REIT securities as a safer way to invest and one that doesn’t require massive amounts of capital. Indeed, more than a dozen countries, including the United Kingdom, Japan and France, as well as Singapore and Hong Kong, have formed REIT structures in the past five years.
“REITs have become an attractive way for investors to go global,” said Keith Pauley, chief investment officer at LaSalle Investment Management Inc., a real estate investment management company in Chicago.
The REIT assumes all risks related to disclosure and regulatory issues.
“If you buy a security, you can buy it today and sell it tomorrow, so you have less risk,” Mr. Torto said. “There’s certainly less risk — but there’s also less return.”