What’s the best approach for investing abroad?

By Jennifer D. Duell

Ask any real estate investor—public or private, institutional or individual—about commercial real estate and all will say it requires local expertise.

Yet, despite its “local” reputation, real estate is becoming a global industry. In fact, more investors are looking beyond U.S. borders for opportunities, driven by a desire for higher yields or diversification. “There are quite a few companies that heretofore wouldn’t have touched the global markets that are now asking how they can best break into the global arena,” says Dorothy Alpert, head of the real estate practice at Deloitte Consulting.

Investors seeking global returns are trying to find the best opportunity for themselves: should they invest in a company that is local to the market in which they want exposure, or should they gravitate to a global company that has established a presence in the market?

On the Same Page

The best strategy for global real estate investment isn’t one-size fits all, Alpert says. Strategies differ based on the type of investor and market dynamics. Additionally, foreign investment strategies must be determined by a thorough evaluation of the legal and tax issues in each country, Alpert notes. “When it comes to investing globally, you have to remember that investors are subject to country specific laws of ownership and how they’ll be taxed,” she says, adding that every investor should be focused on investing in the most tax-efficient way possible.

Moreover, there are subtle differences that investors might not recognize when presented with an opportunity to invest globally. Transparency is an issue for many emerging markets, particularly those that are widely known for political corruption. The quality of real estate often differs from country to country—a class A office building in Chicago may be vastly different in terms of construction and tenant quality than a class A building in Bangalore, India.

That’s why investing in U.S.-based companies with an international presence is not only easier, but often a better bet. U.S. investors and U.S. companies are on the same page when it comes to currency, taxation, building quality and financial reporting expectations. Dealing with a foreign company and foreign markets requires more expertise than most investors have and more oversight than they’re willing to provide.

Benefits of Transparency

Experts suggest investing in a U.S.-based REIT with a global platform or a U.S.-based mutual fund or exchange traded fund that targets non-U.S. REITs rather than investing directly in a real estate company based outside the U.S.

U.S.-based investment vehicles—both REITs and mutual funds—offer a combination of track record and transparency that non-U.S. REITs and funds don’t, says Steve Sterrett, executive vice president and CFO for Simon Property Group (NYSE: SPG), which has a global footprint through its outlet centers in Japan and Mexico, as well as malls and shopping centers across Europe.

“The companies in the U.S. that are pursuing global strategies have longer track records,” Sterrett says, pointing to Brazil as an example. In that particular country, there’s not a real estate company that has been public for more than two years. “Investors end up comparing longtime operators against companies that are relatively new,” he says.

Moreover, Sterrett contends that there’s greater visibility into U.S. REITs because of the size and sophistication of the U.S. capital markets. “Our capital markets are far more transparent than those in other countries,” he says, adding that the U.S. boasts a number of oversight and regulatory agencies like the Securities and Exchange Commission that may not be present or effective in other countries. “Our business model has evolved into a high regulatory environment that ought to give an investor a fair sense of comfort.”

Gaining Global Exposure

That’s why most investors choose securitized investments managed or based in the U.S. as global investment vehicles rather than direct investment into non-U.S. REITs, says Dionisio Meneses, co-manager of the Schwab Global Real Estate Fund (SWAIX), which has investments in 15 countries.

Few retail investors can actually buy non-U.S. REIT stocks because they have not registered with the global stock exchanges, Meneses notes. Additionally, U.S. investors are not allowed to buy into mutual funds that are based in other countries. They are limited to U.S.-based mutual funds, of which there are about 20 global REIT funds, says David Siopack, co-manager of SWAIX.

That’s why Siopack contends that investing in a U.S.-based mutual fund with a global investment focus is the best way to get global exposure. “Even the U.S. REITs that have exposure outside the U.S. are not truly global. If you look at Simon Property Group or ProLogis (NYSE: PLD), they lack sector diversification and they are only in a few markets.”

Choosing Local Partners

Although institutional investors typically have limited their REIT investing to U.S. REITs and mutual funds, more U.S.-based pension fund advisors and life insurance companies are partnering with U.S.-based REITs or U.S.-based funds that are investing overseas.

For example, California Public Employees’ Retirement System (CalPERS), one of the largest pension funds in the nation, partnered with Hines Interests LP to invest in China. CalPERS provided the bulk of the venture’s equity while Hines’ role is to search out investment opportunities on the ground in China.

There are also some U.S. institutional investors who choose to acquire local companies or invest in funds managed by local companies. GE Real Estate, for example, recently invested $20 million in the CITIC Capital Vanke China Property Development Fund.

“Most investors that have some kind of real estate operating expertise are likely to look at a country and pick local partners,” Alpert notes. “However, pension funds are more likely to give their money to a U.S. investment manager. They typically don’t choose to invest directly because they don’t feel they have the necessary expertise.”

Jennifer Duell is a regular contributor to Portfolio.