ProLogis is among several domestic REITs that are steadily expanding into foreign commercial real estate. The company has built a solid base in Japan, with properties that include distribution centers in Tokyo, above, and in Osaka.

By VIVIAN MARINO
Published: January 7, 2007

FOR investors who have been missing out on the prolonged run-up in the shares of real estate investment trusts, or maybe jumped in only recently, the end may not be in sight: there are growing opportunities overseas. Some industry experts say that this is an opportune time to make a move into these nascent markets.

ProLogis

A ProLogis property in Osaka, Japan.

“We don’t think the U.S. REIT market is played out; it will continue its upward growth,” said Steven Carroll, co-chief investment officer at CB Richard Ellis Global Real Estate Securities. “But we think the growth will escalate at a much more rapid pace overseas as more markets become securitized.”

Last week, Britain became the latest country to offer REITs. The corporate structure gives real estate companies favorable tax treatment in exchange for disbursing most of their income to shareholders. The addition of Britain brings to 17 the number of countries with public REIT markets, according to UBS Investment Bank; there are also about a dozen other countries with legislation in place or under consideration to create REITs, though with no public market yet. Germany is expected to offer REITs this spring.

In 1994, only three countries outside the United States allowed REITs, according to UBS.

While the United States is still the world’s dominant REIT market, with around $395 billion in market capitalization out of an estimated worldwide total of $608 billion, last year’s spate of announced mergers and acquisitions is steadily reducing the number of publicly traded shares.

A recent report by Ernst & Young suggests that the rest of the globe is poised to surpass the United States by 2008 in terms of total capitalization. Much of the new growth, it says, is being driven by REIT markets in Australia, France, Japan, Canada, the Netherlands, Singapore and Hong Kong.

The report noted, meanwhile, that some of the lesser-known REIT markets like South Africa have had stellar performances. In fact, a global real estate index offered by the European Public Real Estate Association, the National Association of Real Estate Investment Trusts and FTSE had a 42.35 percent return last year. The domestic REIT market, as measured by the National Association of Real Estate Investment Trusts, rose 34.35 percent in 2006, the seventh consecutive year that REITs outperformed the overall stock market.

“If you’re an investor, it may well be a great opportunity to diversify,” said Dale Anne Reiss, the global leader of Ernst & Young’s real estate practice. “You can really play the real estate market more effectively now.”

She added that shares in some of the newer markets might be undervalued right now because of “pricing inefficiencies” in the underlying assets of some REITs.

Ralph L. Block, author of “Investing in REITs” (Bloomberg Press, 2006) and the publisher of The Essential REIT, a newsletter, agreed that “there are some significant pockets of opportunity.” But he warned that “when someone finds a great opportunity, it usually means that opportunity gets recognized pretty quickly.”

Big investors are already on the lookout. Nearly two-thirds of real estate professionals surveyed last year by the international law firm Bryan Cave said they planned to invest abroad within the next 12 months. And institutional investors — which sank dizzying amounts of money into domestic REITs last year — are also increasing their exposure to international real estate.

Among those increasing allocations into global REITs is the California Public Employees’ Retirement System, known as Calpers, the largest public pension fund with more than $200 billion in assets.

Smaller investors are also finding more opportunities to branch out. In addition to the expanding number of foreign real estate stocks that can be bought through brokers, there are more mutual funds focused on international property.

At the same time, domestic REITs are acquiring more foreign property or forging partnerships. They include companies like ProLogis, the AMB Property Corporation and the Simon Property Group.

Some of the funds rolled out last year include the Franklin Global REIT fund, Cohen & Steers Asia Pacific Realty Shares and the ING International Real Estate fund. The first foreign real estate index fund — the Northern Global Real Estate Index fund from the Northern Trust Corporation — also made its debut, along with the first global real estate exchange-traded fund: the streetTracks International Real Estate E.T.F., from State Street Global Advisors.

Many industry analysts are bullish about the office markets in the West End of London and in central Tokyo, which, they say, have a constrained supply of space.

Jeremy Anagnos, the co-chairman with Mr. Carroll of CB Richard Ellis Global Real Estate Securities, says that the Japanese market in particular is primed to rally after “coming out of its real estate recession that has lasted for 15 years.”

He says that Germany, Europe’s largest economy, offers potential opportunities, too. By many accounts, that country is set to roll into the public markets more than $100 billion in properties.

But the foreign markets are also being supported by an aging population that is looking increasingly for higher-yielding fixed-income investments, Mr. Anagnos added, and REITs can help to satisfy that demand. Many individuals, particularly in Asia, were unable to invest in commercial real estate until REITs came along, he said.

Changes in the way some foreign corporations operate are also helping to create more opportunities for domestic REITs, some experts say. ProLogis, in particular, has had a flurry of activity, including large acquisitions in Britain and the initial public offering of its ProLogis European Properties division. The company is one of the world’s largest managers and developers of distribution centers.

“When we started moving into Europe, the original thought was to serve our U.S. customers that had an international requirement,” said Jeffrey H. Schwartz, the chief executive of ProLogis. “But it has become much more synergistic and powerful than that.”

More business, he said, is now coming from companies in Europe and Asia looking to streamline their operations.

“They used to want to see how big they could become without concern about return on equity,” Mr. Schwartz said. “Now they are looking at how they can create shareholder value, and part of doing that is to become less asset-intensive.”

More than 40 percent of the company’s $25.3 billion in real estate assets under management are outside North America, he said, and in Japan, the average occupancy rate for storage facilities is 99.8 percent, versus 95 percent in the United States.

Mr. Schwartz says he sees opportunities in Central European countries like Poland, the Czech Republic and Hungary. His next big focus, though, is China. Last year, ProLogis announced that it was developing an industrial park in Beijing to serve as the primary logistics and distribution center for the 2008 Olympics.

Ms. Reiss, meanwhile, says she believes that it won’t be long before multinational assets become commonplace in real estate companies.

“It is quite conceivable,” she said, “that you will see assets in Mumbai and Milwaukee and Moscow and Malaysia — all in the same REIT.”

Article by: Vivian Marino - www.nytimes.com