International property investing “is more than just visiting all the place you’ve always wanted to go.”

It is a strategy in which you identify the opportunity, identify and manage the risks and then determine where to go to do business, says Andrew Wood of LendLease Real Estate Investments Inc. in New York.

Why look for global real estate opportunities?

Real estate is a cyclical industry, Wood said, and has evolved from a local business. Real estate investments are diversifying. Because it remains private, market inefficiencies offer opportunities for investors.

When it comes to demand, tenants are global, Wood said. Capital is seeking superior returns on a global basis. In fact, 20 percent of the equity portfolio of pension funds is now outside the United States.

In addition, technology is breaking down barriers.

“Real estate is an ‘emerging,’ not an established opportunity for those who are willing, at this stage, to take risks,” Wood said.

Although a lot of U.S. investors are wary of getting involved in the global real estate market, foreign investors have no qualms about putting their money here. Even with the heightened sense of concerns about terrorism, Freddie Mac and Fannie Mae sold billions in securities to foreign investors last year.

Those securities are backed by mortgages on U.S. homes, and the money Fannie and Freddie take in is used to buy more loans from lenders. More than 60 central banks in other countries invest in U.S. housing through Freddie Mac, which sold $125 billion in securities through international markets in 2001. Freedie has even started issuing paper denominated in the Euro.

For Fannie Mae, 30 percent of the money used to buy $600 billion in home loans last year came from foreign sources.

Inefficiencies in real estate can be market-specific. Investors can exploit market cycles. Research should involve “people on the ground” providing a point of view, he said.

In some investment situations, you need to take a top down/bottom up approach.

For example, top down finds that Japan is a difficult place in which to invest. A bottom-up view suggests that Tokyo has a concentration of activity involving positive demand and growth, where money can be borrowed at low rates.

How do you manage risks? There are a lot of risks – political, market and taxation, to name three – and what you do is develop a research system that will illustrate short-term and long-term risks in each country, including corruption and social unrest, for example.

From this, you create a risk index, Wood said. Risks associated with the United States have an economic focus, for example, while those associated with Russia are political in nature. Europe is least risky for investment, Asia the most risky, with the Americas in between.

Europe, with its concern about currency rates, didn’t have a capital market, something that Andrew Bene of PriceWaterhouseCooper Securities in New York wanted to rectify, even though yields in Europe are lower than the United States.

Now pension funds are able to do it, and the European market was under a half-billion dollars last year. All the large banks are doing securitized deals as well, he said.

Duncan Macaulay of the Highland Group in New York said investors have to understand at the outset that “overseas ain’t Kansas,” and real estate “is an industry divided by a common language,” with differences in terms such as rentable area and net income.

“Bankruptcy law in the United States is clear, but in developing countries, it is a right of passage,” Macaulay said. “In the United States, you lose the property. In Thailand, you keep the property and the money.”

“Laws and practices differ from country to country, and there is a lack of transparency,” he said. For example, in Mexico it is virtually impossible to get a tenant out of a property, while in France, laws prevent you from raising the rent in certain situations.

There are public and private monopolies at work in many countries, and some other countries prohibit foreign ownership of real estate, requiring that you take on a local partner.

There also is a lot of red tape, and “timing of transactions should not be taken for granted,” he said. Corruption is rampant, especially in Nigeria, Pakistan, China and India, which Macaulay described as “kleptocracies.”

Can you outsmart the locals? Macaulay asked.

No, he said. “You need to make friends and put locals on the team.”

Make sure you ask all the fundamental questions about the market, Macaulay said. Look for people who provide information. And as a consultant, don’t forget to be paid, he said.

Published: March 28, 2002

Use of this article without permission is a violation of federal copyright laws.