A Financial Revolution 


March 11, 2006
Look Overseas, Young Man
Over the last few months I've seen numerous magazines and newspapers claiming that the U.S. real estate bubble is beginning to burst. At a minimum, the air is leaking out. U.S. homes are staying on the market longer and buyers are starting to regain their common sense.

So what does this mean for real estate investment trusts? In January, I posted that REITs offer diversification because their prices don't move in tandem with the general stock market. Fortunately, however, not all property markets are as pricey as the U.S. For a number of reasons, real estate markets in Asia and some European countries have lagged the U.S. by a considerable margin. But the economies in these places are strong and the outlook for their property markets (in dollar terms) is good.

It's interesting to note that five of the seven top performing real estate mutual funds (3 month returns) were international. Obviously the cat is out of the bag on this one. That said, I think two funds still look attractive - Fidelity International Real Estate (FIREX) and Alpine International Real Estate Equity (EGLRX). Both are no load and carry a satisfactory fee of 1.26% and 1.18%, respectively. The Fidelity fund emphasizes Asia and the Alpine fund has a slightly broader reach, but focuses on residential properties.

The annual report for Alpine predicts that:

On one hand the high level of M&A activity signifies the strong level of investor demand for property while the expansion of the Initial Public Offerings (IPO) for publicly traded real estate companies demonstrates the amount of capital available for attractive investment opportunities... In our opinion, this is a potential tip of the iceberg, if private property companies around the world seek greater participation in an expansion of property investment, dominated by the capital markets.

Throughout the sixteen years that we have managed this Fund, there has never been so much interest or activity in and among international property stocks. REITs are part of the story, as is the global yield shift. Perhaps the most important elements are the perceptions that foreign real estate markets may offer greater potential upsides than our own and that real estate is well positioned for solid performance in this business cycle. That is our view, as well.

I guess the key question is whether or not we're too late to the party?


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