Investor's Business Daily, June 21st, 2007
Once, the only way to invest in foreign real estate was to buy it. Now, more funds are putting money in overseas real estate stocks.
Charles Schwab launched Global Real Estate Fund SWAIX in May. J&W Seligman & Co. started a closed-end global real estate fund this month, with LaSalle Securities subadvising. Cohen & Steers has also launched an open-end European real estate fund.
Jim Sempere, managing director of real estate investments and research at Schwab, says going global is a natural evolution for real estate funds.
Investors are looking for returns that don't closely track either stock or bond markets, and international equities have become more common parts of portfolios.
What happens in one real estate market doesn't often affect what happens in another.
"The value of real estate comes from what happens in the local market," Sempere said. "Real estate doesn't care who owns it."
Schwab Global Real Estate tracks some 400 real estate investment trusts and real estate operating companies. The fund invests in about 60 of them.
The fund has 35% of its assets in the U.S., 27% in Asia, 25% in Europe and 12% in Canada. The month-old fund has $297 million in assets.
Sempere says Schwab is planning more funds like it, but declined to give details.
Investing in overseas real estate stocks is similar to investing in other international stocks. But REITs are different. Many countries don't have laws governing or allowing REITs.
That leaves the stocks of the operating companies as the best way to get in to the market.
Among the largest holdings in Schwab Global Real Estate is Australia's Westfield Group. Boston Properties BXP, ProLogis PLD and London-based Land Securities each make up 3%-4%.
Recent Interest
Sam Lieber, president of Alpine Mutual Funds, says international real estate didn't make sense until 2003, and it was only recently that many countries allowed REITs.
He cited increased interest in international equities in general.
The $1.9 billion Alpine International Real Estate EGLRX has existed since 1989. Interest has increased in recent years, Lieber says. Performance no doubt has something to do with it. Going into Thursday, the fund was up 13.29% this year. It has cranked out average annual returns of 35.07% for the past three years and 28.11% for the past five years.
Alpine also completed an IPO of a closed-end international real estate fund, Alpine Global Premier Properties Fund AWP, raising $2 billion.
When deciding on investments, Lieber says the firm looks at price to cash flow, price to earnings, and dividend yields. Then makes an educated guess on whether a stock could be trading at a discount or premium to the value of its assets and future earnings.
He adds that Alpine takes a broader view of real estate, with 1,600 stocks in the universe the firm tracks.
Rather than exclusively concentrate on developers, the firm also includes agriculture, home builders and asset management firms with a real estate focus.
REITs, he said, make up 20%-22% of the firm's universe.
J&W Seligman raised $222 million in the IPO for Seligman LaSalle International Real Estate Fund SLS. Eighty percent of its investments are outside the U.S.
Todd Canter, managing director at LaSalle Securities, which subadvises the fund, expects a mid-teens return from real estate markets in Hong Kong, Europe and Japan.
The fund doesn't distinguish between REITs and non-REITs. It uses the UBS Global Investment Index as its benchmark.
The fund's holdings must get 70% of their income from real estate. The fund excludes lenders, however, and avoids residential developers. "There are vast differences in the drivers for residential and commercial real estate," Canter said.
LaSalle and Seligman launched the fund to draw in smaller investors and use the experience LaSalle had developed managing institutional real estate assets, Canter said.
Andrew Gogerty, mutual fund analyst at Morningstar, said the drive to go global comes from shrinking opportunities at home. Returns on real estate have been good for years but are starting to slow.
Another factor is economic growth, especially in Asia, which has driven commercial real estate prices up. Real estate markets have also fared well in Europe.
Some domestic real estate funds have a portion of their assets invested in non-U.S. stocks. Third Avenue Real Estate Value TAREX had 44% of its $3.5 billion in assets invested overseas as of March 31. CGM Realty CGMRX -- the top-performing real estate fund this year going into Tuesday as well as the past three and five years -- had 38% of its $1.2 billion in assets abroad.
