Foreign Real-Estate Funds Boom

Firms Unveil Scores of New Plays, Spurred by Strong Returns and Growth in Overseas REITs

By JEFF D. OPDYKE
 

It is getting easier to invest in Australian shopping malls and Norwegian office towers.

Financial-services firms are rolling out scores of foreign real-estate funds. In the past few weeks alone, Charles Schwab Corp. launched a global real-estate fund that is betting in part on strong rental growth in London office properties. WisdomTree Investments Inc. listed a new exchange-traded fund that tracks an index heavily weighted to Australia, Hong Kong and Japan.

Just this year, real-estate investment trusts were introduced in the U.K.

Several new closed-end funds, aimed at more-conservative investors, also have been launched, including Alpine Global Premier Properties Fund that began trading in April after raising $2 billion.

Investors have poured about $6 billion into foreign real-estate funds this year, substantially more than was invested in domestic property funds, according to Morningstar Inc. Those big inflows follow strong past returns for foreign real-estate-investment trusts, the main holdings of these funds, which rose nearly 31% a year in the three years ended April 30, according to Fidelity Investments. By comparison, U.S. REITs rose 22% in that period, while the S&P 500 was up 8.5%.

Driving the trend: the number of REITs overseas, which makes it easier to launch foreign real-estate funds, money managers say. For decades, REITs, which usually own income-producing properties -- apartment complexes, commercial buildings and other buildings that charge rent -- traded mainly in the U.S. and a few other places. But in recent years, the REIT structure has gained wider approval, and they are now found in nearly two dozen countries. Earlier this year they were introduced in the United Kingdom.

Still, REITs can vary between countries. In Japan, for instance, REITs are passive investment vehicles that are mostly barred from redeveloping properties they own. In other places, however, including Singapore, the REIT structure is more similar to what is found in the U.S., money managers say.

"We finally feel comfortable that there's a universe of investable companies, and growth in the number of new companies," says Steve Buller, portfolio manager for Fidelity International Real Estate Fund.

Foreign funds also often take small stakes in non-REIT companies, including home builders, property developers, and construction or lodging concerns. These holdings can spice up a portfolio, but also can be more volatile than REITs.

AIM Global Real Estate Fund, for instance, has a small stake in Chinese property developer Agile Property Holdings Ltd., and the Dryden Global Real Estate Fund owns shares in Orient-Express Hotels Ltd., a Bermuda-based operator of upscale hotels.

Some of the new real-estate investment trusts invest in developing markets like Brazil.

One of the first decisions to make in buying a fund is whether to choose an international real-estate fund, which invests almost entirely in foreign property, or a global fund, which can hold a third or more of its assets in the U.S. A global fund can be more stable, because of the large size and depth of the U.S. market. But an international fund, because it has greater exposure to foreign economies, could mean more diversification for your portfolio.

Where They Invest

Most foreign real-estate funds have the bulk of their holdings in large, developed markets in Western Europe, North America and Asia, where the range of available companies is wide. Franklin Global Real Estate Fund has about 75% of its assets in the U.S., Australia and Japan.

The fund, which has returned about 2% this year, also holds a small stake in retail properties in South Africa. That country "is benefiting from a large and growing middle class," says portfolio manager Jack Foster.

Alpine International Real Estate Equity Fund, a pioneer in foreign-property-fund investing, has more than half of its assets in residential and retail REITs, and is in 28 countries around the world, including Hong Kong and Poland. Another target: Brazil, whose expanding economy could make it "one of the great places to invest over the next decade," says Alpine Funds President Sam Lieber. The Alpine fund is up nearly 15% this year. Investors can research what individual funds own and where at Morningstar.com or at each fund company's Web site.

Danger Zones

There can be significant risks. One big concern: Many real-estate stocks around the world are relatively pricey, following several years of gains. Mr. Foster at the Franklin fund, says the value of REIT shares around the world has, in some instances, surpassed the value of the underlying properties.

"We think Asia is very strong and will continue to have good growth in returns from the local property stocks and REITs. Europe and the U.S. are overvalued a bit," he says.

Currency is another risk. If the dollar weakens against other currencies, as many economists are concerned it might continue to do, it reduces the value of U.S. investors' foreign holdings. So far this year, the dollar has fallen 2.9% against the euro, but it is up 3.3% against the yen.

A few funds hedge against the dollar's fluctuation, reducing the currency exposure for the investor. At Franklin Global Real Estate, for instance, fund managers concluded that "property is a unique asset class, and we want the real-estate attributes -- high income and low volatility" without the volatility of currency movements, Mr. Foster says.

Fund companies detail their currency strategy in a fund's prospectus, typically available online. Fees, too, can vary widely. Fidelity International Real Estate fund charges about 0.85% annually, and the Alpine International Real Estate fund charges about 1.17%. At Kensington International Real Estate Fund, investors pay about 1.65% for the C-class shares, which charge no front-end load, though their continuing expenses can be higher than other classes.

Help From ETFs

Investors can also trim expenses by switching to index-tracking funds and ETFs that passively mirror proprietary indexes of real-estate holdings, rather than relying on active stock-picking. The new WisdomTree International Real Estate Fund tracks an index that is heavily tilted toward Australia and some Asian countries, while Northern Global Real Estate Index Fund, from Northern Trust Corp., is tied to an index heavily dependent on U.S. real-estate stocks.

That fund is up about 1.4% this year. And State Street Global Advisors runs the Dow Jones Wilshire International Real Estate ETF based on an index that excludes the U.S. and travels to smaller markets like Poland and Malaysia. This year the fund is up about 11.6%.

Investors looking for a more-conservative play on global real estate might consider closed-end funds, which trade on a stock exchange and generally concentrate on generating income. ING Clarion Global Real Estate Income Fund, for instance, currently yields nearly 7% annually, while Alpine's new Global Premier Properties fund yields nearly 8%.