The Wall Street Journal of Thursday, November 10, 2010, carried an article by Anton Troianovski reporting that REITs are going global to find deals. The article cites the fact that many analysts question this strategy but also points out that the impetus is fueled by the enormous amounts of cash that has been raised by public companies in the last two years.
Money was raised ostensibly to take advantage of the â€œbargainâ€ prices anticipated from the fallout of the collapse of the commercial real estate market. However, the expected flood of properties did not materialize for three reasons. First, the holders of good properties resisted selling in a â€œdownâ€ market. Secondly, the holders of properties acquired through foreclosure focused on trying to improve the properties before taking them to market. And, thirdly, lender/holders of foreclosed properties have a habit of â€œstudying a property to deathâ€ before facing reality. Thus, it is not surprising that there are not abundant opportunities for opportunistic real estate money.
With that said, one must still question the strategy of looking â€œoffshoreâ€ for real estate opportunities. It is not like the U S REITs are the only ones on the planet who understand real estate. The article points out that the path to overseas real estate investments is a somewhat well traveled path by both overseas investors and U S investors. Thus, why would anyone be convinced that foreign opportunities are any better than those at home? It is suggested that investors look at the history of investing in real estate outside of the country of expertise by both U S investors and foreign investors. The beating that Canadian investors took in the real estate market, when they moved into U S real estate in a major way should not be lost. Nor, should the drubbing taken by the Japanese in U S real estate be overlooked. Those in the brokerage business at the time privately laughed at the over-inflated prices being paid, for whatever reason. For the Japanese, in particular, it was a double edged sword in that they bought when they paid over 300+ yen for the dollar and sold when the yen was at less than 150 to the dollar. More recently, funds invested in foreign real estate havenâ€™t faired so well either.
The desire to find global investments seems to be driven by the fact that these REITs raised money and now have to find investment outlets for that money. Finding none at home, they are looking elsewhere. But, that search may not be the result of an abundance of opportunities outside of the U S but, rather the pressure to invest the money raised. This may be an example of â€œother peopleâ€™s moneyâ€ driving the search and could result in money managers making the same â€œcompetitive buyingâ€ mistakes as were made during the bubble market.
When companies stray from the â€˜basicsâ€ investors in the stocks of those companies should be extra cautious. There is a risk that the overseas property markets may not be as well understood as the markets at home, which, in and of itself, can cause over reaching. But, there is also the currency exchange rate volatility risk. Global real estate may not be a good answer.