International real estate funds, particularly emerging-market portfolios, had a fantastic run in 2012, on the back of the diminishing threat of global inflation and improved prospects for global growth fueled by the domestic consumption dynamic in many emerging-market nations. And the run is continuing.
Even today, real estate is looking to be the best way to capture the upside of these consumer-driven economies around the world, according to Jason Yablon, vice president and portfolio manager at the investment management firm Cohen & Steers, whose emerging-markets real estate fund was up 40% in 2012.
"The continued securitization of real estate in many emerging-market countries is still in its early stages, and we really think real estate, compared to other sectors, is a much better way to play on the domestic consumption theme, particularly with economic fundamentals continuing to improve worldwide," Yablon said. "Assuming that inflation doesn't get out of hand this year, emerging-market real estate stocks have a chance to continue their outperformance."
The stocks of real estate companies in many emerging-market countries are also attractive because unlike companies in the U.S., they are not highly levered, said Jeremy Schwartz, director of research at WisdomTree Investments. Stacking that up against current valuations, and factoring in PE ratios and cashflow, many real estate companies look good, he says, provided that investors can properly manage the currency risk that comes with investing in emerging markets.
The emerging-market world is also extremely fragmented when it comes to real estate stocks, and with different countries at different points in the economic cycle, investors will need to be extremely vigilant in making their choices this year, according to Yablon, "because in emerging market real estate, you can create a lot of value easily, but you can destroy it just as easily."
The most important factor to consider in real estate is the progress countries have made in terms of securitization, Yablon said. In Mexico, for instance, REIT rules were only established in the past year and thus far, just four companies have come out with public issues, which means there's a lot of potential going forward, he said.
