Study Abroad

Looking for opportunities in international property markets

How they look at you when you talk about owning (listed) international property

This year, the outperformance of international equities relative to the U.S. has been well-reported. Listed real estate has been no exception. At least as measured by the public-traded firms, international property markets have been on fire.

There has been surprising dispersion amid some clear themes. Europe has been a winner, while French property firms have outperformed German ones by 20%! Brazil and Chile are off to rip-roaring starts as well. Are these results just the impact of a general rotation into international markets, or are underlying property fundamentals creating more sustainable tailwinds for international real estate?

The country returns below are dollar denominated through the end of the first quarter. Of course, the decline in USD has boosted these returns. In general, you are looking at a +5-8% currency effect. In some sense, foreign real estate is a good option if you are trying to reduce dollar exposure. For the most part, property firms collect revenue in their local currency. Conversely, a German manufacturer that exports to the U.S. will find their products less competitive as the dollar weakens. As I discussed with

Dave Waters

last week, foreign securities with hard asset bases act as a natural currency hedge over reasonable time periods.

REIT structures are only available in ~40 countries, so looking across REOCs (real estate operating companies) and REITs helps ascertain the whole picture.

Source: S&P Global through 3/31/2025

Extraordinary Physical Assets

A Distorted Snapshot of Value

At the index level, international real estate looks cheap. Reporting and structure differences make NAV and cap rate comparisons challenging. As a result, I look at price-to-book ratios to arrive at a more standardized view of relative value.

U.S. REITs currently trade around ~2.0x book value, while international real estate trades at ~0.80x book value. There is no doubt that international real estate companies trade at meaningful discounts to the U.S. REITs, but they are in line with the broader discount of international equities (~2.5x discount).

For real estate specifically, index construction and market structure skew those comparisons. In the U.S., the index is overweight tech-levered REITs like towers and data centers, pulling valuations up, while abroad, many REITs are diversified, which generally pulls their multiples down. Further, the largest developed international real estate market is Japan, where the largest REITs tend to be in the office sector. In short, the decision to rotate from domestic REITs to international ones is complicated by market structure and local nuances.

To better understand what spread actually exists, we can zoom in on a subsector. I will use multifamily as a proxy, looking at the largest operators in the U.S., Germany, and Japan: AvalonBay (AVB), Vonovia (VNA), and Advance Residence (3269). Continuing with price-to-book (specifically price-to-tangible book value), we can modify the justified price-to-book formula for REITs to use FFO instead of EPS.

As a quick review, justified price-to-book is a metric of a REIT’s returns on equity relative to what investors demand from a cost-of-equity standpoint. The numerator is the FFO over TBV minus the long-term growth rate over the implied cost of equity minus the same long-term growth rate¹. If you are a finance professor about to have an aneurysm, please see the footnote.

\(\begin{align} \frac{P}{TBV}_{\text{justified}} &= \frac{\frac{FFO}{TBV} - g}{r - g} \\ \text{where:} \\ P &= \text{Price} \\ TBV &= \text{Tangible Book Value} \\ FFO &= \text{Funds From Operations} \\ g &= \text{Long-term growth rate} \\ r &= \text{Required rate of return} \end{align}\)

Source: Tikr, Company Filings, L.E. Calculations

For our first look, I will set all the long-term growth outlooks to 2.5% (roughly a developed market GDP growth estimate). By this measure, Germany looks undervalued but not more than the U.S., while Japan is roughly at fair value. This view is both currency and local conditions agnostic.

Per CenterSquare and CBRE, Germany is experiencing substantial urban rent growth. Also, keep in mind that ECB rates are expected to fall over the next year,

German residential should benefit from declining interest rates and remains attractive in a low-growth, low-inflation environment. Indications from both appraisers and the companies lead us to believe we are likely close to a trough in values. This reduces deleveraging requirements for the companies and opens the opportunity for more meaningful external growth as companies begin making acquisitions again in the coming year.

The supply and demand imbalance remains very favorable, with new completions having averaged below 300,000 units annually for over ten years against a German government target of at least 400,000. This trend is set to continue as the number of new building permits for apartments continues to fall. When combined with rent caps in place, the sector should continue to grow rents regardless of the economic environment, as a significant rent mark-to-market exists in all regions of Germany.

Source: CenterSquare

Meanwhile, Japan is breaking out of a decades-long malaise and is finally experiencing a modicum of inflation and wage growth. As a result, Tokyo's rent growth has begun to resemble other global gateway cities.