Going International with Real Estate

Owning real estate overseas is seen by many as the ultimate symbol of wealth. For most, it takes years of dedication just to save enough for the required 20% downpayment to buy a rental house in your neighborhood.

Purchasing a chalet in France or Switzerland is an entirely different ballgame. For centuries, only the super wealthy could pull that off.

I still can’t help you buy that ski chalet in the Alps, but international real estate investing is more accessible to the average investor than ever before. In today’s article, I’ll explain how you too can get it on international real estate investing plus many of the key risks and potential benefits you should be aware of.

Domestic versus Foreign Real Estate

Most investors have a basic understanding of how commercial real estate (CRE) investing works in their local market. What changes when you go overseas? Almost all the details are different, but the core reasons many investors allocate to real estate stay the same.

As a U.S. investor, most properties in western Europe, for example, will be priced in British Pounds or Euros. This matters for a couple reasons. To start, your total return, which includes the change in the value of the property and cash flows, is subject to currency risk.

If the Euro declines 5% versus the U.S. dollar, that subtracts from your return on investments in the Eurozone over the hold period. The fluctuation in exchange rates could more than offset the gains made on the investment. On the other hand, owning multiple established currencies provides potential diversification benefits. That’s one reason the ultra-wealthy prefer to own properties in multiple countries. If the dollar tumbles, at least some of your eggs are in the Euro or Pound bucket.

This also impacts our next subject: debt. Just like in the U.S., there are highly regulated systems throughout the world that dictate how much and what type of leverage you can use when acquiring real estate.

For many years, interest rates in Western Europe were less than the U.S. This allowed investors to obtain cheaper financing on properties located there versus the U.S. all other things equal. But the structure of the debt can be a lot different than U.S. investors are accustomed to.

The loan-to-value (LTV) on the average European real estate loan is 60-65%. That’s a few percent lower (more conservative) than U.S. average, but a closer look reveals greater differences.

Since the U.S. government subsidies multifamily loans through Freddie Mac and Fannie Mae, apartment buildings stateside have average LVTs of 70-75%. Higher leverage can increase returns but also losses. Office properties have held up better in Europe than in the U.S., so European banks are more willing to lend on that asset class.

Real estate mortgages are much different too. The U.S. tax code and regulatory incentives for lenders are different than the rest of the world. In Germany, the largest economy in Western Europe, only 40% of CRE loans are fixed-rate. In the U.K., it’s even lower at 30%. It’s the opposite in the U.S., with 60-65% of CRE loans fixed-rate and the remainder floating-rate.

So on average, real estate investors in Europe are much more exposed to changes in interest rates (up and down). Be sure to check and understand the terms of any debt associated with potential real estate investments overseas.

Lease structures are similar in Europe with many properties opting for double or triple-net leases. That means the tenant, rather than the building owner, is responsible for most of the expenses including maintenance, property taxes, and insurance premiums. The leases are often indexed to local benchmark.

While it’s usually the Consumer Price Index (CPI) in the U.S., most Eurozone countries use the European Union Consumer Price Index. Since inflation varies across the world, so to will changes in rent based on these indexes. In most of Asia, each country has their own CPI like the U.S. does.

Keep in mind that all the due diligence requirements still apply to foreign properties. In fact, extra care is often required since investors are less familiar with local laws and customs. That’s why it’s worth considering using a professional manager with experience in each area they invest in.

Top Markets & How to Access

The largest markets for U.S. real estate investors are in Western Europe, especially the UK and Germany. These regions have long histories with real estate, usually a lot longer than in the U.S. Markets in other parts of the world are worth investigating too, but their legal systems and norms tend to vary more relative to the U.S. Their currencies and economies may also be more volatile, so be sure to take that into account.

SEGRO plc is a British property investment and development company founded in 1920. It specializes in industrial and logistics properties like warehouses and distribution centers. Its core markets are the U.K. and Germany. It has been structured as a Real Estate Investment Trust (REIT) since 2007 when REIT laws were introduced in the U.K. For U.S. investors familiar with REITs, they already have a good grasp on REITs in other countries as they all follow similar rules.

Several European REITs like SEGRO are accessible through the most popular U.S. brokers. British Land Company plc is another popular European REIT with U.S. investors. It’s also UK based. Shareholders own a small stake in a large portfolio of high-quality London properties.

We aren’t providing our opinion on these companies as investments. Instead, we are using them as real-world examples of how the average investors can access professionally managed real estate in some of the top markets globally.

Most of the world’s top private fund managers are active in global real estate too. Blackstone and other top Wall Street managers have large stakes in European and Asian real estate. It even purchased the famous London Eye Ferris wheel in 2006.

Conclusion

Just like with stocks, there is a whole world out there for real estate investors.

China’s real estate market alone is comparable to that of the U.S. Japan, the UK, India, and Germany are also trillion dollar markets. Thanks to increasing array of private fund offerings and several established European REITs, there more ways than ever for U.S. investors to “go global” with their real estate holdings. This is a potentially great way to further diversify a portfolio from a geographic, currency, and asset perspective.

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍‍

Nothing in this blog is or should be construed as investment advice or an offer or solicitation of offers of investments. Both Real Estate Investments and Securities offerings are speculative and involve substantial risks. Risks include but are not limited to illiquidity, lack of diversification, complete loss of capital, default risk, and capital call risk. Investments may not achieve their objectives. Investors who cannot afford to lose their entire investment should not invest in such offerings. Consult with your legal and investment professionals prior to making any investment decisions. All Securities are offered through North Capital Private Securities, Member FINRA/SIPC.

‍