More than a dozen countries offer REITs or REIT-like structures, which are publicly traded companies with portfolios of commercial property that distribute most of their income to shareholders. Several governments, too, are considering legislation to create them. Market watchers see growing opportunities outside the United States, where in some regions commercial real estate has been showing signs of overheating.
International REITs may also offer better value right now. Buyers of domestic REIT stocks can expect to pay a 5 to 10 percent premium to the underlying property value, while many foreign stocks trade at par or, in some cases, at a discount. International REIT yields are comparable to those in the United States — roughly 4.5 percent worldwide.
The price gap largely reflects past performance: American REIT's returned 20 percent, annualized, over the five years that ended March 31, as measured by the National Association of Real Estate Investment Trusts composite index. The index, however, was down around 7.5 percent in the first quarter.
Many money managers still remain bullish on the domestic market, attributing this year's about-face to a much-needed correction and dismissing speculation that commercial real estate is headed for bubble territory. But at the same time, they like the diversity that global REIT's afford, along with their "low correlation" with most other financial securities — in other words, their tendency not to move in tandem.
Germany is expected to create REITs sometime next year, and so is Britain. Italy is also considering them. Since 2001, Japan, France, Singapore, Hong Kong and South Korea have enacted REIT legislation.
Most global versions are modeled after the American REIT, which has been around for four decades but did not really take off until the early 1990s. In exchange for paying no tax on corporate income, real estate investment trusts are required to disburse a large percentage of what they earn in the form of dividends.
The American market remains by far the largest, with at least half of all REITs, but real estate analysts expect to see more public ownership of property management companies abroad as foreign companies push for more favorable tax treatment. Worldwide real estate equities, including REITs, now total around $600 billion, nearly twice as much as six years ago.
Samuel A. Lieber, manager of the Alpine International Real Estate Fund, which has been around since 1989, said he expected to double his foreign REIT holdings to around 30 percent in the next 18 months as more stocks hit the market.
Among Lieber's favorites these days are the French companies Gecina, which develops high-end office and apartment buildings in Paris, and Unibail, which builds shopping centers. The Fortune Real Estate Investment Trust, which is traded in Singapore, also makes his list. The company owns five shopping malls in Hong Kong.
Real estate analysts also see improvement ahead in many economies in Asia, including those of Japan, Hong Kong and Singapore, and in Australia. Mr. Crowe noted that in Tokyo, in particular, real estate prices have stabilized, and office supply and vacancy rates are falling. Mr. Cohen added that "there's infrastructure that needs to be created" in many Asian cities, too.
So far, most of the interest in foreign REITs has come from large institutional investors, money managers say, but even investors with more modest means can gain a foothold in income-producing real estate abroad. The growth of real estate stocks overseas has spawned new mutual funds. The ING Global Real Estate Fund opened in 2001 and the Fidelity International Real Estate Fund last September. Cohen & Steers introduced both closed- and open-end global real estate funds this year.
Average investors can also buy American REITs that are expanding overseas.
