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27/09/06 -
Risk Analysis in International Real Estate Investing |
The late 1980s and early 1990s marked a burgeoning
interest in international estate investment among United States institutions. Many investors believed that
investment in international real estate could enhance overall performance by increasing returns and reducing
portfolio volatility. During the late 1990s, the impetus for investing in international real estate came from the
poor performance of American real estate during the 1987 to 1992 period. Investors were concerned about the
difficulty of selling under-performing real estate assets during a period of significant over-production and weak
demand.
By 2000, the Euro was beginning to have a remarkably beneficial effect on Europe. It integrated the 11 countries'
financial systems, decreasing the cost of capital by creating a deeper, more liquid market. Many European Union (EU)
countries support EU enlargement to include the current ten accession (2004) candidates-Malta, Hungary, Poland,
Cyprus, the Czech Republic, Slovakia, Estonia, Latvia, Lithuania, and Slovenia. Other countries being considered for
membership later on in the decade include Switzerland, Norway, Iceland, Bulgaria, Romania, and Turkey.
Current EU countries would prefer that new members be wealthier nations, with Switzerland and Norway as the most
popular candidates. This preference is linked to the common perception that admitting poorer countries to the EU
could unleash substantial labor migration flows. The precise scale of migration flows from the accession candidates
is difficult to predict. Estimates based on the post-war German experience suggest that about 3.5% of the population
of the 10 new members (1% of the current EU population) will seek jobs in Western Europe.
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Recently, the amount and cost of capital have respectively increased and declined. On average, European companies
pay more than half a percentage point less for their capital that if the Euro did not exist. More than $600 billion
were raised last year. This means that more Euro-denominated bonds were issued in 2001 than dollar-denominated
bonds. A return to growing rents and overall economic health is likely to occur by 2005 in Paris, Milan, and
Brussels. Markets like London, Frankfurt, Stockholm, and Madrid will continue to shift sideways during the next
three years.
IMPLICATIONS OF THE NEW GLOBAL ECONOMY
The post-industrial age began soon after World War II in the United States and arrived in Western Europe and Japan
in the 1960s. Its distinguishing characteristic is a declining emphasis on material goods and a growing interest in
quality of life. Quaternary activities steadily expand, resulting in an elaborate division of labor and supplying a
whole new set of societal needs. Service activities including banking, retail, telecommunications services, and
public sector activities, such as education and medical care, have grown in importance. However, this does not mean
that manufacturing is on the way out.
The key characteristic of the New Economy is increasing global interdependence. Rising trade fosters a cycle leading
to greater competition and efficiency, more rapid diffusion of innovations, and greater productivity gains. However,
the growing dependence of services on a sophisticated infrastructure of hardware and software has increased their
cyclical vulnerability.
The New Economy reflects a willingness to undertake massive risky investment in innovative information technology.
This, when combined with a decade of improvements in the U.S. financial markets, down-sizing of the Federal
government, and efforts by corporations to cut costs and increase efficiency, has had a profound impact on the
competitiveness of the American economy.
The Institute for International Economics, a Washington fl-think-tank, expects that between 30% and 40% of global
financial assets will end up denominated in Euros (with between 40% and 50% in dollars, and the rest in yen and a
few other currencies). This would imply a shift of between $500 billion and $1 trillion into Euros, primarily out of
dollars, as investors and central banks reshuffle their portfolios.
CHALLENGE OF INTERNATIONAL REAL ESTATE INVESTMENT
International real estate investment represents considerable decision-making, organization and managerial challenges
above and beyond the problems of achieving the desired cash flows at the building level. These challenges are
accentuated by the time-distance gap from the United States and the different socio-economic and cultural structures
associated with individual national markets.
International real estate investment requires a concentrated scrutiny of the problems and opportunities linked to
such decisions. A number of macro issues must be examined to reduce systematic risks for portfolio allocation across
particular nations. By extension, international diversification assists, but does not remove, systematic risks.
One of the most popular means of international real estate investment is a country fund. Using country funds,
investors can speculate in a single foreign market with minimal costs, construct their own personal international
country portfolios using country funds as building blocks, and diversify into emerging markets that are otherwise
inaccessible. Some of the most common variables in the initial winnowing process used to determine the economic
desirability of a nation for real estate investment are gross domestic product (GDP), per capita income, and the
percentage of GDP devoted to service industries. |
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