International Real Estate Markets

Abstract

International real estate investment refers to any investment portfolios or strategies that include real estate from different countries. These portfolios can be mixed with other asset classes such as stocks and bonds, or invested only in real estate. Perhaps the most common reason for including international real estate assets in an investment portfolio is risk reduction through geographic diversification, although its viability and effectiveness are sometimes challenged. The chapter later provides a discussion of other arguments for and against diversification using real estate.Another important issue is how to invest in foreign real estate markets. In general, real estate can be divided into direct real estate (DRE) and indirect real estate (IRE) investment. Direct real estate refers to the direct ownership and operation of real property assets such as houses, shopping centers, hotels, and offices. Indirect real estate refers to the use of public (listed) real estate companies, private (unlisted) real estate funds, REITs, MBS, and related investments. These investments offer exposure without direct involvement in the selection, creation, and management of physical real estate. Indirect real estate should be more convenient for international investors, but this involves costs. The section on international real estate performance shows that the correlation between DRE and IRE can differ significantly within the same market, so the choice of real estate investment vehicles becomes highly important. The section on institutional settings further examines different institutional costs and constraints in international real estate investment.Although this chapter does not provide a review of all real estate markets in the world, it does cover major real estate markets. Specifically, it examines 17 real estate markets on four continents — North America, Europe, Asia, and Australia. The markets discussed are: (1) Australia, (2) Austria, (3) Canada, (4) China, (5) Finland, (6) France, (7) Germany, (8) Hong Kong, (9) Italy, (10) Japan, (11) The Netherlands, (12) Norway, (13) Singapore, (14) Sweden, (15) Switzerland, (16) the United Kingdom, and (17) the United States. The chapter excludes Spain because some data are unavailable. To make best use of available data for a consistent comparison across market, the time frame of study is 2007Q3 to 2012Q2. The Oxford Housing Indexes data available from Datastream serve as performance indicators for the DRE markets. The FTSE EPRA/NAREIT indexes represent the IRE markets, which include all types of listed real estate securities such as real estate companies and REITs. Because the FTSE EPRA/NAREIT index is unavailable in China, the Shanghai Stock Exchange Real Estate Index, which reflects the performance of major Chinese real estate companies, is used instead.