World's 10 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.

No. 1: New York, N.Y.
New York is suffering from the same maladies as London: a slowing national economy met with slowing residential sales and a slumping absorption rate in the commercial sector. While big-ticket buys in buildings like 15 Central Park West continue to statistically mask the flattening housing market, the commercial sector is already showing strain. Based on figures from Newmark Knight Frank, rents in the highest-cost areas of Park Avenue and Rockefeller Center are starting to come down between 2% and 4%. Nevertheless, investors are betting on the long-term strength of New York and looking for deals in the increasingly volatile market.

No. 2: London
Always one of the most attractive markets for international real estate investment, London has softened in both the residential and commercial sectors. According to the Land Registry, sales are down 10% from last year, and investment firm Knight Frank notes that mortgage lending is down 30% from last year. A gross domestic product that's fallen to 0.4% in the first quarter and inflation above government targets are troublesome to investors.

No. 3: Washington, D.C.
The D.C. residential market has suffered from overbuilding and poor loans, especially in the exurbs, which has in turn attracted opportunity funds looking for bargain buys. A larger market in the District, however, is the commercial property market, which benefits from all the government-related businesses in the area. Of particular note is Northern Virginia, which, besides having less expensive space than D.C., houses some of the nation's richest counties, a significant factor in the retail market.

No. 4: Paris
International investors continue to pump money into Paris, particularly the office market, where vacancies are at all-time lows, according to Knight Frank, a London real estate investment firm. Rents in the central business district have responded particularly well, as supply doesn't meet demand, and there's limited construction in the pipeline. La Defense, where there's more construction and slightly higher vacancies, isn't appreciating quite as quickly.

No. 5: Shanghai
As far as China's cities are concerned, Shanghai's office rental growth and residential real estate prices have trailed Hong Kong's. Still, as Shanghai continues to develop and grow--and remains cheaper than Hong Kong--investors are bullish about its continuing growth potential. A good example is the residential market: Hong Kong prices are eight times those in Shanghai, on a per-square-foot basis, but going rents for those same homes are only three times higher in Hong Kong. As such, the capitalization rate for residential properties in Shanghai is 7%, while in Hong Kong, it's only 3.3%, based on figures from Knight Frank, a London real estate investment firm

No. 6: Tokyo
The Japanese economy has benefited from its lack of exposure in the subprime banking debacle that has thrown Western banks for a loop. As yields around the world are compressing, part of what makes Japan a more stable bet is that inflation has been extremely low. While inflation in Vietnam and China have been 19% and 9%, respectively, Japan has been mostly flat, staying around a healthy 1% inflation rate, which also serves to prove to outside investors that Japan's longstanding deflationary problems are subsiding.

No. 7: Singapore
Price growth in residential housing has slowed as the result of low transaction volume. From the fourth quarter of 2007 to the first quarter of 2008, home sales dropped by 47%, according to Knight Frank, a London real estate investment firm. The retail side of things is a different picture. Consumer spending and tourism are at all-time highs, which has brought money into the retail business. In addition, the growth of medical tourism in particular has made medical properties some of the fastest-appreciating real estate in the country.

No. 8: Munich, Germany
The biggest thing to like in Munich is the office sector. According to Knight Frank a London real estate investment firm, leasing rates are at all-time highs, largely thanks to strong international investment in the city. In 2007, $10 billion was invested into the city's real estate market, compared with $2.6 billion in 2005.

No. 9: Sydney, Australia
Australia's industry and materials economy has helped fuel much of Asia's growth, and so long as commodity prices continue to rise, the future looks bright. New South Wales' gross state product grew by a paltry 0.5% in 2006, but surged 3% in 2007, according to Access Economics, an Australian financial research group. Continuing growth in the macro-economy bodes well for rental yields in residential, commercial and industrial markets, though the nation's citizens currently find themselves in the least affordable housing market in the nation's history.

No. 10: Hong Kong
While residential properties go for price-per-square-foot rates that would make even a New Yorker blush, the critical market for real estate investment in Hong Kong is in the office-space sector, as the city is one of Asia's financial capitals. It doesn't hurt that the small island is so fully developed that, due to a lack of space, supply often lags behind demand. While rents for prime locations have dipped between 2% and 5% since March, rents in the Traditional Center and in Cheung Sha Wan, for example, are up 35% and 52%, according to Knight Frank, a London real estate investment firm.

No. 10: Hong Kong
While residential properties go for price-per-square-foot rates that would make even a New Yorker blush, the critical market for real estate investment in Hong Kong is in the office-space sector, as the city is one of Asia's financial capitals. It doesn't hurt that the small island is so fully developed that, due to a lack of space, supply often lags behind demand. While rents for prime locations have dipped between 2% and 5% since March, rents in the Traditional Center and in Cheung Sha Wan, for example, are up 35% and 52%, according to Knight Frank, a London real estate investment firm.


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.

Nevertheless, 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 Asia
When 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 Space
Investing 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."

(prepared by Matt Woolsey/Forbes Oct 7/08)