Constructing an International Real Estate Portfolio - Coursework Example

 Executive summary This report focuses on approaches to gain exposure to foreign real estate markets, as well as their merits and demerits. The report also focuses on the most effective ways of finding property to purchase in cross border markets. The most effective way to find a building in international market is through real estate agent. The most effective way to organize the buying process is through procurement. The most effective way to manage the buildings is to outsource management services rather than doing it yourself (DIY). Finally, the use of multiple real estate managers to manage buildings in international market is the most suitable compared to single manager. Introduction Real estate is among the oldest types of investing. In global investments terms, real estate falls under the alternative assets. Real estate is an established attribute of the portfolios of some of the world’s leading investors such as the pension funds, sovereign assets funds and insurance corporations. Recent studies and research show that real estate remains the largest chunk of alternative assets for annuity funds, accounting for the majority of the alternative assets managed on behalf of funds around the globe. Traditionally, real estate markets were popular in developed markets such as the United States and Europe. Investors now find it easy to invest their finances in real estate in other countries outside Europe and United States (REIA 2013). Real estate increasingly plays a vital role in the strategies of asset allocation. This calls for investors to rethink their approach to get an edge of the current environment. With so much uncertainty surrounding the rate of growth and government policies in countries around the globe, investors in real estate are well served to advance a global real estate strategy. A well served global strategy helps in protecting against the exogenous shocks that arise in various parts of the world. Moreover, a properly developed strategy will be helpful to the investors as it will help them seize the best prospects and comprehensive awareness of local markets. Rebalancing domestic allocations to seize the benefits related with an excellently diversified global real estate portfolio makes strategic and tactical sense as investors, companies and markets change their focus from a localized to globalized view (PREI 2013). The advantages and disadvantages of different approaches to gaining exposure to international real estate markets Institutional investors opt to gain exposure in the international real estate market through various approaches. The approaches mainly differ depending on the investors’ attitude towards risk, their desired structures, as well as the extent of involvement they want in the properties in which they invest. The following are the advantages and disadvantages of the main approaches to gaining exposure to international real estate markets. Direct investments A direct investment in real estate entails purchasing the whole or part of a physical property. Direct real estate investment is advantageous in that the investors have direct control. The investors are the landlord and they are involved in renting out the property. They can increase the rent at their discretion to generate more revenue. Direct investment also allows investors to reap benefits of tax advantages. In real estate investments, there are myriad opportunities of taking advantages of tax such as writing off depreciation. Direct investment increases investors leverage as they have access to low cost financing through mortgages. Investors also stand out to gain from reliable and steady incomes as returns from real estate are less volatile compared to other direct investments such as shares and bonds. Some of the disadvantages associated with direct entry into the international real market are that brokerage expenses and commission are high (Levy 2012). The more unique a property is, the higher the cost of gathering information. This adds to the brokerage and other acquisition costs. The tax merits the come with direct investments are prone to political risks. Indirect listed/unlisted funds Indirect investment in real estate implies that investors purchase shares in an entity or a group of companies that own and manages property. These companies are generally referred to as real estate investments trusts (REITs). The key advantages of indirect entry are that it is less costly than direct entry. Secondly, indirect investments are highly liquid and investors can sell their shares at any time as they would do with any stock. Indirect investment through REITs is also beneficial in that it allows diverse properties. REITs are experienced in the real estate markets and they easily invest in complex properties such as shopping malls. Additionally, the investors do not have to incur maintenance cost as opposed to direct investment. In spite of the above merits for indirect real estate investments, investors do not have control of the property as management and partial ownership is not in their hands. Due to their partial ownership, their earnings are restricted to the amount of their contribution (Northern Trust Corporation 2009). Diversification The core diversification benefit is that it does not leave investors vulnerable to the performance of single country or market. Every region and market has its own cost-effective drivers that yield changing rates of growth at different times. Securities for real estate are local in nature and are closely tied to the strength of the economy of the market in which they are founded. As such, diversification of as a mode of gaining exposure to global real estate market exposes the investment to favorable demographic trends. For illustration, Japan has an aging population and an educated workforce. This presents an opportunity in real estate investments as enlightened people may want to own houses or live in up to date houses. Diversification as an entry mode is subject to heightened exposure. When holdings are largely diversified, investors are likely to suffer whenever their portfolios dip in value. Although portfolio shields investors from excessive financial exposure, a decline in the markets could make the investors miss out on potentially major profits (Levy 2012). Evaluation of different options in the acquisition and management of 100% equity interests in cross-border real estate investments The most effective way of finding buildings to buy in overseas markets Investors wishing to purchase property in cross border markets have several options of finding buildings to buy. Some of the most effective ways to find buildings to purchase include use of real estate agents, online mechanisms and obtaining information from real estate magazines. The real estate agents offer various services depending on the type of property they have been appointed to lease, sell and manage on behalf of the owner. Real estate agents have engaging personality and are able to communicate, understand and relate to a great variety of people. As such, real estate agents can be effective in helping the investors find property in cross border markets. Apart from getting information on buildings to buy from real estate agents, investors can also employ their own agent. The investors should look for a licensed professional whose dexterity in property sourcing is outstanding. This is the most effective way as real estate agents from host countries where the buildings are located may charge extremely large amounts. Online search is another mode of finding buildings to buy in international markets (PREI 2013). In the contemporary technological world, the internet has revolutionized how business and trade are carried out. Buyers and sellers of property meet online and organize on how to purchase or sell a property. As such, investors can use the search engines to find information on advertisements of buildings on sale in their desired locations. However, search engines may offer limited information that may result in skewed decisions. The most effective way of deciding which buildings to reject or to bid for In order to determine which buildings to reject and which ones to bid for, investors have to look at the pertinent factors that will affect the occupiers of the said property in the future. The first factor to evaluate is the financial factor. Some property sellers look at the buyers’ financial power and income. Some investors may find this condition hard to abide with and thus decide to reject, while others may positively take the condition and bid the property. If the investors need a guarantor, they have to ensure that their agent finds guarantor friendly buildings. Another factor is the lifestyle of the immediate neighbors. Some people have lifestyles that attract attention and high public profiles. Some people do not want to occupy houses that attract undo attention. Depending on the investors’ perception, they may reject or bid a building constructed in high public profile areas. Failure on seller’s part to fulfill additional requirements of investors is another critical factor to consider in purchasing a building. Investors may ask for high demands that the seller may fail to oblige to (Northern Trust Corporation 2009). In that case, the investors may turn down the offer. Other factors that investors may consider are such as noise and occupier and pet friendly environment. For illustration, a building that is located from a nearby airport may be prone to noise. Noise thus becomes the basis of rejecting or bidding the offer. The most effective way to organize the buying process For an investor who wants to purchase a building in an international market, the most effective way to organize the buying process is through the procurement. Procuring a property in international markets will save the investors’ time as it ensures that investors obtain the suitable solution to meet their needs. Secondly, procuring helps investors to pay the right price as procurement is a competitive process where the investor will choose the supplier with the suitable qualifications and friendly prices. Moreover, purchasing the building through the procurement process ensures that the investors do not overlook essential steps that may haunt them later. For illustration, investors suffer from information asymmetry with regard to an international property. On the other hand, suppliers have adequate market knowledge which will be incorporated in the procurement process. The best way to get buildings managed once they are acquired Once the investors have decided on which buildings to purchase and completed the buying process, they have to manage the building. One way to manage the building is for the investors to manage the building themselves. This is generically referred to as DIY (do it yourself). Nonetheless, investors managing it themselves may prove to be an intricate affair as the costs of directly managing an overseas property may be high. Additionally, the investors may not have adequate in-house resources to manage foreign asset. As such, outsourcing of management services comes in handy. Investors can outsource the service from one service provider or from several providers. Investors can opt for single suppliers who are experts in real estate services. The suppliers could either be local, regional or global such as the CBRE, JLL, and CWHB. Single suppliers provide a one stop shop where property owners will get all kinds of services in real estate ranging from market search, brokerage, property appraisal, and asset and estate management. Merits and demerits of single and multiple suppliers Obtaining management services from a single real estate is beneficial in the following ways. One is that investors will only have one relationship to manage. This can help strengthen the relationship into a collaborative partnership. Having a single property manager leads to clearer responsibilities as compared to when the same role is awarded to several suppliers. Clear responsibilities in turn result in greater commitments. Some of the challenges of having a single supplier are that the investors will be highly dependent on the single manager. In the case that investors have got issues of quality compromises or other work problems with the supplier, supply interruptions are likely to emerge (Zsidisin and Ritchie 2008). Investors can also look for multiple agents to carry out the management of their foreign assets. Having multiple suppliers is advantageous in that investors enjoy a healthy and competitive provision of services and price. Numerous suppliers are experts in different fields which will reflect in the management of the property. In addition, multiple managers of the real estate reduce investor’s dependence on one supplier and thus spreading the risk of quality compromise. Nonetheless, having suppliers may read to ambiguous roles and thus reduced commitment. Conclusion and recommendations In the modern global world, investment in real estate requires investors to be fully aware of the factors that affect real estate investment decisions. Real estate requires a substantial amount of investment and thus it is pertinent for investors to assess the investment opportunities to avoid being haunted by missed information. Investors should use direct means of entering in the international property market as it derives various advantages over indirect methods. Investors should use real estate agents to find buildings to purchase in international markets. Once the right buildings have been spotted, investors should use the procurement process in the buying process. Finally, investors should employ multiple real estate managers to manage their overseas buildings. Bibliography Levy, C.E., 2012. Top dozen reasons for co-op board rejections. Accessed on 28 August 2013 from< http://cooperator.com/articles/1450/1/Top-Dozen-Reasons-for-Co-op-Board- Rejections/Page1.html>. Northern Trust Corporation. 2009. The right time for global real estate? Accessed on 28 August 2013 from< http://www.northerntrust.com/pointofview/09_Summer/08_Oct/global-real- estate.html> PREI. 2013. Why global real estate securities? Accessed on 28 August 2013 from< http://www.investmentmanagement.prudential.com/documents/pimusa/PRU_Why_GRE S_Mar_13.pdf>. REIA. 2013. Roles in the real estate sector. Accessed on 28 August 2013 from Zsidisin, G.A. and Ritchie, B., 2008. Supply Chain Risk: A Handbook of Assessment, Management, and Performance. New York: Springer. Read More