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Mutual Funds

Real Estate Goes Global

How you can play the explosion in international property stocks.

The bull market in hotels, offices and malls knows few boundaries. Consider that in 2006 through early December, European real estate securities jumped an average of 53% in dollar terms, while Asian property shares rose 28%. Both gains handily exceeded those of stocks in general in those regions.

Fueling the surge are three trends: raging development in Europe and Asia; the spread of real estate investment trusts to Asia and Britain and soon to Germany and Italy; and abundant liquidity -- that is, a lot of money available for investment. A sagging dollar has also helped.

Real estate and foreign stocks are both vital cogs in an investment plan; you could justify placing half of your real estate investments in U.S. stocks and half in foreign shares. The foreign holdings should benefit from the continuing decline of the dollar against many overseas currencies. Moreover, it's likely that property values somewhere will keep escalating even when U.S. retail and office markets cool, a possibility in 2007. But don't expect to find greater yields overseas -- foreign real estate stocks yield 4% or so, about the same as U.S. REITs.

John Robertson, a portfolio manager for RREEF, a realty research and investment firm, says Asia is the most attractive region, particularly Taiwan, Hong Kong, Japan, Singapore and parts of China. Rents are rising and land is scarce, so buildings are gaining value. Robertson also likes Europe because REITs are taking root there.


Old timer

About a dozen mutual funds focus on foreign property stocks. The one with the longest record, dating to 1989, is Alpine International Real Estate (symbol EGLRX; 888-785-5578), managed by Sam Lieber. As is the case with Alpine's flagship U.S. fund (see November article), International Real Estate's results can be erratic. From 1995 through 2002, the fund recorded eight straight years of either single-digit or negative returns. But over the past four years to December 11, it returned a torrid 35% annualized. With 144 stocks (biggest position: Bermuda-based Orient-Express Hotels), the fund is all over the map. Annual expenses of 1.18% are reasonable.

Fidelity International Real Estate is just a bit more than two years old. Like Alpine, it has no load and charges modest fees (1.12% annually). The fund (FIREX; 800-544-8544), run by Matthew Lentz over the past year, gained 15% in 2005 and 33% in the first 11 months of '06.

Die-hard copycats should consider Northern Global Real Estate Index. The new fund (NGREX; 800-595-9111) tracks the FTSE EPRA/NAREIT global index of more than 300 stocks, weighted 50% U.S. and Canadian, 30% Asian and 20% European. Its biggest holding, mall owner Westfield Group, is an Australian company, but 60% of its retail space is in the U.S.

The best pure play on Asian property stocks is six-month-old Cohen Steers Asia Pacific Realty. The fund (800-330-7348) is currently focusing on companies in Hong Kong, Japan and Australia. It's a load fund, but it's the only fund dedicated to Asian real estate, and Cohen Steers has a long record investing in real estate. The Class C shares (APFCX) charge stiff annual fees of 2.45%, but you can bail out without an exit charge after one year.