Ask Not Why International, Ask Why Not International

"Why international?" has become an increasingly familiar question asked by dint of real estate investors in new years. Traditionally, investors have justified allocations to international real estate with arguments based upon either enhancing return or diversification. the two arguments are valid, of course. In fact, although debates above the merits of investing internationally many times presume that the potential diversification and turn back enhancement benefits are somehow mutually exclusive, one as well as the other can be realized with a carefully discloseed and executed investment strategy.

Still, for investors in the United States who have a wealth of opportunities available in their domestic market, the decision to invest overseas is more discretionary than it is for many of their foreign counterparts, particularly those investors whose domestic markets are too small to accommodate their desired real estate exposing However, changes in the global marketplace above the past decade suggest that the opportunity take away froms associated with not investing internationally have increased. Today, at least three compelling arguments exist-prudence, diversification, and diverse opportunities-that remind of that U.S. investors should take a different approach when deciding whether or not to invest overseas.

Prudence

Perhaps the greatest in quantity obvious answer to the question "Why international?" is the size and distribution of the commercial real estate universe. The U is a large and diverse market, on the contrary it still represents a minority share of the global investable universe of commercial real estate.

Since 1990 the U GDP share relative to the world total fluttered between 25% and 32.5% (see Exhibit 1) to be paid to the dollar's recent weakness, the general U.S. GDP share is about 277% above the longer term, the U economy will likely command a run share of 30%. As of 2005 the top-down estimate of the U share of global investable real estate ranges from 327% to 377% with a midpoint of 352%1 Since 1990 the U real estate share has been as depressed as 32.5% and as high as 40.0%-all mid-point estimates. The U commercial real estate market will likely claim a world share of 35% to 40%-the 5% differential exhibits the uncertainty in the estimate itself.

With almost two-thirds of the investable real estate universe located outside of the U it appears fairly obvious that the place of opportunities available to global investors is significantly larger and more diverse than that available to U investors who "stay home" The wealth of opportunities outside the U is not a novel development. With the possible exception of Asia, which likely gained share owed to Japan's booming real estate market in the 1980 the distribution of real estate assets has probably changed relatively little since the early 1970

What has changed, however, is the accessibility of markets all above the world with the unfolding of investment infrastructure and vehicles that simply did not exist twenty or level ten years ago. As newly as the late 1990s, for example, foreign investors could not invest directly in southerly Korea. Today, the market is readily accessible and has experienced significant foreign capital inflows.

To be confident meaningful information costs are still associated with investing in real estate overseas. Taxes and general reception risks need to be weighed. Legal combination of parts to form a wholes and leasing terms and practices differ. level language barriers and time girths are potential obstacles. However, given the size and increasing accessibility of many foreign markets, wisdom alone dictates that U.S. investors should at least consider a certain quantity of exposure to international real estate.

Investors who make choice of to invest overseas must first consider the size of the allocation. Although the U market exhibits about one-third of the investable universe, it would not be appropriate for a U investor to allocate two-thirds of the real estate portfolio to international investments. The wealth of opportunities in the U structural imperfections in many foreign markets, general reception risk, and a home bias in the liabilities of U institutional investors argue against similar a large international exposure. To take advantage of the potential benefits of investing internationally, however, investors ne a meaningful allocationotherwise, the effort and take away from are not likely to be rewarded.

Intuitively, an allocation of 20% to 35% of the real estate portfolio should provide sufficient exposing for most U.S. investors to realize the benefits of investing internationally. This range is justifiable from a theoretical perspective. Exhibit 2 present to views a range of possible allocations to international real estate based upon different volatility and correlation assumptions.

To avoid the mentality of chasing higher go [i]or[/i] come backs the allocation results shown throw back identical expected returns for the pair U.S. and international real estate. below the equal-return assumption, the optimal allocation is a function of the correlation between U and international real estate and the volatility ratio of international to U real estate.2