Photo: Courtesy of Oren Alexander
Five years after house prices began to fall in the United States — and more than two decades after the biggest property bubble ever burst in Japan — one of the most successful investors in the world is betting on a recovery.Fortunately for British investors keen to gain some exposure to international real estate, you don’t need to tie up hundreds of thousands of pounds in bricks and mortar overseas.
You can reduce the risks inherent in dealing with foreign tenants, tax and legislation by using a pooled fund — such as a unit or investment trust — where minimum investments are often just a few hundred pounds.
Some, such as the little-known Japan Residential Investment Company, even pay a decent dividend. In this case, 6.6pc net of basic-rate tax.
First, though, why would anyone want to buy into markets where prices have been falling for years? Some comfort can be taken from the fact that the American billionaire and investment guru Warren Buffett is leading the way back into property.
He recently used his fund Berkshire Hathaway to obtain a majority stake in a US estate agent and other housing-related ventures.
While Mr Buffett is not infallible, he clearly knows that the first step toward making a profit is to buy low. American house prices have fallen by 50pc in some states and several analysts have begun to argue that they now represent good value.
Even bigger house price falls on the other side of the world are also attracting bargain-seekers. Tokyo property prices today are a fraction of the level they reached in 1989.
Since then, the Japanese stock market has fallen to a quarter of its peak level, with similar declines in property valuations. But some investors willing to accept high risks in pursuit of high returns reckon that decline could be about to reverse.
Japan Residential Investment Company is an investment trust traded on the London Stock Exchange. It lets out flats in Tokyo, Osaka and Nagoya to generate total returns of 31pc over the past year, according to statisticians Morningstar.
Despite that above-average performance and inflation-beating dividends mentioned earlier, the shares continue to trade at an 11pc discount to net asset value. One reason is that although the fund has a market capitalisation of £108m, many experts consider it too obscure to recommend to clients — and likely to stay that way.
For example, Ben Yearsley of stockbrokers Charles Stanley said: “JRIC is too small and esoteric for most investors. The most common way of playing overseas property is through funds that invest in listed property companies or real estate investment trusts (Reits).
“Funds such as First State Global Property Securities, M & G Global Real Estate Securities or Schroder Global Property Securities will give all-round exposure.”
Another expert who expresses caution is Lauren Charnley of stockbrokers Redmayne-Bentley who said: “Japan Residential Investment Company is extremely specialised and would only suit a small portion of investors.
“A product such as Fidelity Global Property Fund offers exposure to the global property market and more than half the fund is invested in America or developed Asia. When looking at overseas markets, it may be prudent to ensure the fund is well diversified.”
Diminishing risk by diversification — often abbreviated to the injunction “spread risk” — is sometimes said to be the first rule of investment. Ian Cooper of Brewin Dolphin favours TR Property Investment Trust as a means of gaining broad exposure to international property opportunities.
He said: “Managed by the intriguingly named Marcus Phayre-Mudge, this trust offers investors pan-European property equity exposure with a limited amount of direct UK property. TR Property is invested in London, Scandinavia and German residential, while avoiding poorer markets such as the Netherlands and Belgium, the overvalued Swiss market and troubled European states such as Spain and Greece.
“Another attraction of the trust is the income which we think gets a little overlooked, especially in the current environment. This trust yields in excess of 4pc, the dividend has grown by 15pc per annum over the past 10 years and is supported by revenue reserves equal to more than one year’s dividends.”
Contrarian investors — or those who like to buy when others sell — may even take comfort from recent price falls. Alan Steel of Alan Steel Asset Management explained: “On the basis that the past really is a good guide to what happens next, the performance of the First State Global Property Securities Fund over the last five horrendously difficult years, augurs well for the next five years.
“This fund is up 57pc net of charges — double the average for the property sector. The managers obviously made correct calls geographically, with more than half their assets in the US and their second highest weighting in Australia — another winner.”
Against all that, anyone who writes anything positive about property can expect to be vilified for “ramping” by the super cynics of cyberspace, as your humble correspondent knows from experience. But the important point for investors is not the past or even the present — both of which are well documented — but what might happen in future.
Sharp falls in property valuations have been noted around the world for five years now. But nobody will ring a bell at the bottom of the market, and a trend is only a trend until it stops.
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