International Real Estate Investing
The world has become a market accessible to all those willing to get involved. Global trade, spearheaded by the multilateral efforts of a vast majority of the world's nations, is now common place and widely regarded as the engine of global economic prosperity. Advances in technology have increased the ease and cost of moving people around the globe. Great economic advances are underway in the world's two most populous countries, India and China, with other countries likewise engaged in growth. These factors combined with creative real estate ownership structures, like the Real Estate Investment Trust (REIT), already firmly entrenched in the United States and gaining popularity around the globe, have made international real estate both an opportunity and a reality for many people. For United States real estate investors accustomed to high returns on domestic investments, the global real estate market offers an alternative to the slumping domestic real estate market. Over the long term, the real estate industry appears bound toward increased global ownership and involvement. This article reviews some basic concepts of international real estate investing, the REIT structure, and some hot areas for foreign investment.
Keywords Diversification; International Real Estate; Real Estate Investment Trust (REIT); Real Property; Real-estate Backed Securities; World Trade Organization (WTO)
International Business: International Real Estate Investing
Innovations in transportation and communication combined with political stability and integration, and increased trade and cross border activities have created an environment in which an increasing number of people are expanding their real estate activities to foreign countries. This trend is in accord with the overall increase in global trade and investment as indicated by the creation and development of the World Trade Organization. Investment tends to be bilateral; most countries that invest in foreign counties also have foreign investors in their country's real estate. The investors buy, sell and trade real property, and real-estate backed securities. The investors may be individuals who invest relatively small sums, large amounts by financial institutions, investment companies, and multinational corporations or anything in between.
While the amount invested and the particular type of holdings varies, each investor typically desires growth, appreciation, portfolio diversification among other common investment goals. However, specific individuals may have a particular objective in addition to the typical goals. For example, a family may purchase a vacation home in a tropical area for their personal enjoyment while anticipating the appreciation of that real property. Financial institutions, investing their client's funds, typically seek capital appreciation in addition to a reasonable cash flow. In addition to investment, a multinational corporation may seek property for their own corporate use. For example, a US retailer may buy or lease a shopping center in Dubai, or a UK law firm may seek an office suite to expand its operations to the local market.
Real Estate Investment Trusts (REITs)
Diversification is an accepted practice within many asset classes, for example stocks, and in an investment portfolio as a whole. Diversification by country and by sector can provide protection against market fluctuations and provide strong returns. The push for international property investing, can be attributed to a lack of local opportunities. Diversification within funds that invest in real property can include international real estate investment trust (REIT). REITs are popular real estate investment vehicles in the United States and their popularity and use is increasing around the world.
A REIT, or Real Estate Investment Trust, is an investment structure created by an act of Congress in 1960. Prior to 1960, only wealthy individuals and corporations had the financial resources necessary to invest in significant real estate projects such as shopping malls, corporate parks and health care facilities. In response, Congress passed the Real Estate Investment Trust Act of 1960. This legislation exempted these special-purpose companies from corporate income tax if certain criterion were met. It was hoped that the financial incentive would cause investors to pool their resources together to form companies with significant real estate assets, providing the same opportunities to the average American as were available to the elite. Three years later, the first REIT was formed.
Function of REITs
REITs were designed to provide investors with the opportunity to participate directly in the ownership or financing of real estate projects by providing them with a tradable interest in a pool of real estate-related assets. REITs own, and often operate, income-producing real estate such as office buildings, apartments, shopping centers, warehouses and hotels. A REIT uses the pooled capital of many investors to purchase and manage income property (called an equity REIT) or mortgage loans (called a mortgage REIT). REITs are traded on major exchanges just like stocks. They are also granted special tax considerations, REIT are exempt from corporate tax provided they distribute 90% of their income to investors as dividends. Because REITs are stocks traded on exchanges they are highly liquid.
Worldwide Development of REITs
REITs have been popular in the United States since Congress authorized their use in 1960, and REITs are beginning to catch on in Asia. Singapore opened its stock market to REITs in 2002 and Hong Kong in 2005. Since 2000, Japan, South Korea, France, Taiwan and Malaysia have adopted REIT-like organizations. The governments of the United Kingdom, Germany and Italy approved REITs in 2007 and Finland and Spain followed suit in 2009 (Niskanen & Falkenbach, 2010). A REIT was implemented in Thailand in 2013 (“Thailand braces for impact”, 2013). Currently, Chinese law allows a type of quasi-REIT to operate on a restricted basis (Chan, 2011). With a majority of real estate development funded by banks, the potential for Chinese REITs is vast and would reduce bank exposure to the real estate market, create a more professional environment for property investment and provide access to the Chinese market for relatively conservative foreign investors. Foreign REIT capital is an important source of funding for investment in China. Real estate developers in China, for example, faced with increasingly tighter bank lending, are turning to funding from international REITs with capital to invest. Chinese law, however, has several obstacles to overcome before western style REIT investing can occur. For example, China prohibits funding to originate in the mainland, and therefore all funding must come from overseas, the Chinese tax rules are not as favorable as they are in the west which would eat away at profits. Even though domestic Chinese REIT market has not developed, interest remains high and China is seen as attractive option for foreign REIT funds seeking to diversify in Asia (Business China, 2005).
Proliferation of Global Real Estate Investment
The United States has been focused inwardly on growing the domestic economy and has had a relatively minor role in the global real estate movement up until the late twentieth century. While American construction companies and banks compete around the world for projects, investment bankers and advisors, and real estate developers have only more recently seriously moved into international real estate. Some of the factors that probably contributed to the move are worldwide financial deregulation, worldwide tax reform, declining property values in the United States, increased economic growth abroad, government emphasis on exports and better transportation and information technology. Factors that may have prevented a United States move into the global real estate arena were lack of foreign language skills among real estate professionals, thriving domestic economy, restated foreign financial markets, lack of professional training in international real estate and real...
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