World's Best Places To Invest In Real Estate

With each passing day of bad market news, it's easy to see why there's so much skepticism about real estate investing. Despite banks' shareholders and equity investors tending to want less real estate in their portfolios, however, there are myriad growth opportunities in properties ranging from from apartments in Sydney to office buildings in Shanghai. And some investors are shopping aggressively.

While investors from pension funds in Paris to middle-class property speculators in Las Vegas have been stung by problems in the American residential real estate market, plenty of individual and institutional investors are gobbling up real estate in other sectors. Just this week, in fact, the government of Abu Dhabi bought a 90% stake in New York City's iconic Chrysler building for $800 million.

Though a skyscraper isn't quite in every investor's budget (or wildest dreams), the timing might be right to follow that lead and make significant investments in certain cities around the world.In Depth: World's Best Places To Invest In Real Estate

The Association of Foreign Investors in Real Estate, a nonprofit research association, tracks where its member investors are finding the best opportunities around the world. AFIRE surveys its 200 members--who collectively hold $700 billion of cross-border real estate--about where they're finding the best opportunities for investment and appreciation. While these investors' primary holdings are in commercial real estate, residential, retail and industrial properties are also considered.

The opportunities vary from country to country, and at first glance, the U.S. and Britain would seem to be places to avoid investing. Both countries are facing an economic downturn and increasing price inflation. Because consumers are paying more for staple goods and have decreasing home equity, the amount they have to spend on discretionary items falls, and, in turn, so does the value of most retail property--making that retail property less attractive an investment.

Related StoriesWorst Cities For Homeowner DebtIncreasingly Affordable U.S. Housing MarketsNevertheless, in times of global economic uncertainty, investors flock to markets that have proved stable in the long term.

That's why New York and London occupy the top spots on AFIRE's list, with Washington, D.C. and Paris taking the next two spots.Areas that have been largely unaffected by inflation and the subprime crisis, like Toyko, are also attracting investors' attention. Japan is one of the few countries to have inflation at 1%, and its local banks have stayed healthier than Western banks for largely avoiding toxic mortgage-backed securities.

The Appeal Of AsiaWhen examining markets for large-scale real estate investment, traditional thinking about a homebuyer looking to own a single property doesn't apply. Investors can move money more seamlessly between countries than an individual, for starters, but investors also have a different way of calculating the long-term value of a particular property.

Therein lies the appeal of investing in property in Asia.While an individual buying a home is interested in price, appreciation and perceived value based on the location or the surrounding neighborhood, investors look more at capitalization rate, the interplay between how much property costs and how much it can be rented for.

For example, consider the differences between the Hong Kong and Shanghai residential markets. Hong Kong property is more valuable, going for $2,218 per square foot, according to Knight Frank, a London-based investment firm. Shanghai property sells for just $366 per square foot. If you own an apartment in each place, you're going to become richer selling in Hong Kong than in Shanghai.However, when you factor in what those same properties can be rented for, investors have a lot more to like in Shanghai. Hong Kong residences can be rented for $6.10 per square foot per month, compared with $2.10 per square foot per month in Shanghai.

Now do the math. For every dollar it costs to buy a Hong Kong residence, you can recoup 3.3% a year in the rental market. In Shanghai, you can get a 6.9% return. Less money down to start coupled with a greater percentage return means investors rate Shanghai a better investment market.

Stick With Office SpaceInvesting in the Chinese residential market, however, has become a tricky proposition, as government restrictions on foreigners buying property present problems for residential investors.

That makes the office sector in a city like Shanghai all the more attractive, especially as the International Monetary Fund forecasts a 9% rise in Chinese gross domestic product over the next year--which means more companies will have more money to spend on office space.

For investors, that means taking money out of residential properties and moving it into office buildings."We believe investors will shy away from the residential sector on the mainland, as it is a major target of the ongoing tightening policy," says Xavier Wong, director of research at Knight Frank Hong Kong.

"This will benefit the Grade-A office sales market."Do you think the numbers add up? Where are you investing? Add your thoughts in the Reader Comments section below.

That push-and-pull stands at the heart of global real estate investing, and is why investors change their opinions of real estate investment opportunities from year to year. In the early half of this decade, for example, investors flocked to developing markets such as Eastern Europe.

But by the second half, and well into 2008, money has been moving out of that area, due to a general lack of transparency, ownership and title--commonplace issues in post-Soviet governments.

For the moment, investors don't feel they're getting a good return for the risk they're taking on."Lots of people believe that there is a compression of yields around the world in some of these emerging countries," says Jim Fetgatter, chief executive of AFIRE. "You're better off going to one of the well-established, transparent markets than some other place that has a lot of risk, where you're not being compensated for that risk."

As markets change, whether because of economic slowdowns, rapid growth or government policy, the important thing is to keep money in growing sectors. And if things crash, as they have in many of America's residential real estate markets, that just means it's time for the bargain hunters and opportunity funds to have their day.In Depth: World's Best Places To Invest In

source: Forbes