What's Wrong With REITs?

Date: 01/12/2007

International Living Postcards--Saturday Edition

Saturday, Jan. 13, 2007
Paris, France

I'm often asked about the real estate portfolio I manage, spread, as it is, around the world. Isn't it difficult to keep on top of everything, readers wonder. Believe it or not, as long as you are diversified in the types of property you invest in, and arrange for good local managers, you can keep the administration to a manageable minimum.

The only way to virtually eliminate the need to pay attention to your real estate investments is to make them indirect. The trade-off is that you lose control over the productive asset…you can't make the decision to improve a property for better returns or raise the rent, for example.

The most readily available indirect real estate investment you can make is through a publicly traded REIT. Personally, I don't buy these. Not because they can't be good investments, but because they amount to stocks that pay high dividends and whose values fluctuate similar to bond prices. You typically invest in REITs for income rather than capital appreciation, and, right now, I'm more interested in capital appreciation. Your situation, though, may be different.

In the last six years or so, more publicly traded REITs have become available outside the U.S., with more countries passing REIT-type laws every year. These REITs offer an easy way to diversify your real estate investment portfolio with international holdings. REIT prices in new markets can take awhile to reach equilibrium, which means, say, if you bought into markets like Singapore and Japan when they first started issuing REITs, you could have seen some nice capital appreciation with many of the initial listings. But, for the most part, in generally stable international markets, as I said, you can expect most of your return from the dividends.

If you are looking for capital appreciation rather than income, as I am, then you are looking at investing directly with a developer (or perhaps a non-traded REIT…more on this in a future Saturday Edition). There's never any shortage of developers with small to medium projects looking for partners on the international scene. The problem is finding them…and then doing the necessary due diligence on both the property and the developer to reach a comfort level to make the investment. However, once you've accomplished those things, your work is done. Typically, you won't have anything to administer yourself. You'll simply wait for the project to complete or to reach whatever exit strategy the developer proposed.

This type of investing isn't for the faint of heart or for anyone who needs ready access to his money. You've got to remember that developer timeline projections for completion are only an estimate, and plenty of things can (and do) slow or stall a project…from government bureaucracy to slower than anticipated sales. However, the potential returns can make up for the higher risk levels. That's the whole point. Plus, with a development investment, you are in until the exit strategy is reached…and then you get your payout. You don't have to worry about making any sell decision as time passes, as you do with a REIT.

How do you find a foreign developer deal? The best way is to speak with real estate attorneys in the countries where you are interested in investing. Typically, they do both individual retail closings and developer deals, and they'll know who's looking for capital investors. You can ask your U.S. attorney for in-country attorney referrals or check the list of approved attorneys published by First American Title. I've found this to be a useful resource.

Lief Simon
For International Living

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Editor's note: Lief Simon is an international real estate consultant working with developers and investors. Over the last 10 years, he has invested in real estate in more than a dozen countries from Argentina to Thailand. Lief looks for one of two market situations when identifying opportunities in which to invest: an abundance of opportunity created by a market distortion (crisis investing); or a chance to follow the path of progress (new infrastructure or trends).