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By Rana Foroohar
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Property, like politics, used to be local. After all, what demands more on-the-ground knowledge than buying a home? But over the last few years real estate has gone global. Already, there's a good chance you or someone you know owns a second home abroad. You may even unwittingly own a stake in a Guangzhou office block, via your pension fund. "Over the last five years, both direct and indirect cross-border real-estate investment has been on the rise," says Tony Horrell, CEO of European capital markets for property-investment firm Jones Lang LaSalle. "By some estimates, half of the world's wealth is now in real estate."
While such figures are impossible to verify, clearly investors in the United States and Europe are pouring money into foreign real estate. Experts say cross-border residential deals have been rising steadily throughout Europe and Asia for the last five years. Some buyers, encouraged by rising incomes and falling prices for air travel, have bought vacation pads in popular markets like Spain, Eastern Europe and Turkey. Many others have put money in the rapidly expanding universe of funds that allow retail investors to take a stake in commercial property worldwide. In Europe, cross-border commercial investments have increased 70 percent since 2000.
The attraction is strong performance--in the United Kingdom, for example, property has outperformed both stocks and bonds over the last one-, three-, five- and 10-year periods. In parts of the Costa del Sol in Spain, Turkish beach resorts including Kalkan, and parts of Cyprus, house prices have risen 100 percent or more since 2000. Many commercial-property funds have seen returns of 15 to 20 percent in recent years.
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The British especially, but also the Germans and the newly affluent Irish, are among those snapping up second homes overseas. They are drawn by rising house prices in places like Spain, Portugal and Eastern Europe, and encouraged by the fact that the euro has made Pan-European borrowing and lending much simpler. Economist Michael Ball, author of the Royal Institute of Chartered Surveyors' European Housing Review, predicts that the market for such properties will only grow as the costs of all sorts of building materials and household goods fall. "The globalization of labor means that all of the secondary costs of homeownership--furniture, electronics, clothing, kitchen counters, whatever--have fallen dramatically. What was only feasible for the very rich in the 1950s and 1960s is now becoming commonplace."
Decreasing travel costs play a big role--according to British lender Abbey National, house prices around EasyJet and Ryanair routes in France jumped an average of 22 percent between 2000 and 2002 (with some still rising). As costs on long-haul routes fall, countries like Antigua, Malaysia, Dubai, Cape Verde and Egypt are marketing themselves as second-home locales.
It's increasingly easy for little guys to invest in commercial development through funds like real-estate investment trusts (REITs), which have been available in the United States for years. Now they are coming to Europe--France, Belgium and the Netherlands have recently introduced REIT-type vehicles. Germany and the United Kingdom are considering them. In Germany, open-ended funds (which are like REITs, but not publicly traded) have been the major force in commercial-property markets since 2002, representing some $80 billion in real-estate investment. A downturn in Germany is pushing these funds into international markets, meaning that "German dentists are increasingly likely to own a slice of some new Asian office park or mall," says Horrell. A recent UBS survey found that European pension funds currently hold about 6.5 percent of their portfolio in real estate, but more than half have plans to increase that to between 11 and 15 percent in the next few years.
Low-risk funds will be looking at commercial property in London, Paris and Milan, poised to do well if the global economic upturn continues. Last year overseas investment in British commercial property soared 152 percent to 15.9 billion pounds. Medium risk takers are putting money into Eastern Europe. Those looking for even higher returns are thinking of Istanbul, Moscow and various parts of India, where the government is making it easier for foreigners to invest in property. Of course, rising interest rates and a glut of money-dampening returns could spoil the party. Still, PricewaterhouseCoopers predicts that European real-estate markets will continue to outperform bonds and equities in the coming year. The rewards from cross-border investment in Europe and elsewhere are sure to be spread globally.
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