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This chapter addresses some of the unique risks and characteristics of investing across U.S. borders in various established and emerging markets. It dispels the myths that the rest of the world is inept and capital starved and that U.S. investors can waltz into another country, win top deals, and exit easily.
Some 60 percent of investment-quality real estate lies outside of the U.S. While non-U.S. real estate markets may be inefficient relative to the U.S., local players are savvy and ambitious and best positioned to profit from change. Currency risk, market opacity, and unfamiliar legal dynamics become additional risks when making investments outside of the U.S., as does the re-striking of local partnership terms by the in-country partner.
Japan and Western Europe are both stable but expensive markets in which to invest, with yields too low to justify in many cases. Latin America is politically and economically volatile, and the inflation protection of real estate results in pricing paid by locals that is generally out of reach for U.S. investor returns targets.
Corruption and fraud are major deterrents for investing in Brazil, Russia, India, and China, each having its own additional idiosyncrasies that make confidently deploying capital a challenge for U.S. players.
Despite the perils, successful large-scale global real estate investment companies will ultimately evolve, for the simple reasons that both the tenant base and capital markets are continually globalizing. It makes sense that firms from all sectors (banks, auto, law, entertainment, etc.) will turn to global space providers. In addition, global capital sources will gravitate to the most efficient real estate firms pulling them into new markets. As the home of the globalization process, U.S. real estate companies should be among the leaders of this process in the property sector, and the best opportunistic American firms will ultimately demonstrate that globalized real estate investment is more than just an idea with potential.
These are the types of questions you’ll be able to answer after studying the full chapter.
1. What are three characteristics of international markets that present additional risks to real estate investors?
2. What does it mean to hedge currency, and what are two potential applications of currency hedging in an international real estate transaction?
3. Why is commercial real estate a potentially good investment in countries with high inflation?
Investing outside of the U.S.
Currency Hedge – the purchasing of a contract to protect against fluctuations in currencies detrimentally impacting an international property investment prior to closing on the property, or relating to the property’s local currency operating cash flows.