Le Strip Mall

By Eric J. Fry

"I only get one good idea per year," the voice on the other
end of the phone began, "but I’ve got a decent one now…I
think."

"It’s only February," your editor replied. "Are you sure
you wanna commit this early in the year?"

"Yeah, I think so…the main idea is pretty simple: Buying
global commercial real estate."

"Okay," your editor replied, "let’s hear it."

"Well, a couple months back I was poking around for foreign
real estate stocks. In the process of looking, I found a
few stocks – mostly foreign REITs (real estate investment
trusts) – that interested me. And then I discovered that a
REIT by the name of the ‘ING Clarion Global Real Estate
Income Fund’ (NYSE: IGR) kept showing up as an owner of the
stocks I liked. So I decided to stop working so hard, and
just buy the fund."

"Has this thing been around long?" your editor asked.

"No, it celebrates its first birthday later this week. It’s
a U.S.-based, closed-end fund that focuses on investing in
foreign real estate, mostly commercial REITS."

"I think I know your thinking on this," your editor said,
"but go ahead and tell me the rationale for buying a
foreign-focused REIT, as opposed to the U.S. variety."

"Well, for starters; it’s a hedge against a falling
dollar," the voice on the phone replied, "And this
particular hedge pays a plump dividend, which is secured by
income-producing assets."

"Sounds nice," your editor flattered the voice on the
phone, "and the risks for a dollar-based investor are
pretty clear: a dollar rally and/or a rise in interest
rates."

"Right," the voice agreed, "but even these risks might not
be as bad as they seem. First of all, the dollar-rally risk
is one I can tolerate, because most of my other assets are
still dollar-based. In other words, I consider this fund a
partial hedge against my dollar holdings."

"Seems like a reasonable approach," your editor agreed. "I
guess the worst-case scenario for IGR would be something
akin to a best-case scenario for the US economy: Life in
the 50 states proceeds flawlessly – cryogenic science
progresses to such a level of sophistication that
Greenspan’s tenure as chairman of the Fed becomes assured
until 2050, at least. Therefore, interest rates stay low,
the dollar strengthens and your IGR investment becomes a
money-loser. Meanwhile, however, the Dow climbs to 20,000
and your million-dollar home becomes a $1.5 million home."

"Something like that."

"But what if interest rates rise?" your editor persisted.

"Steeply rising rates are clearly a risk for IGR," the
voice admitted. "We witnessed that Friday, when the
surprisingly large jump in the PPI caused all interest-rate
sensitive securities to fall, including IGR. But a
continuing rise in rates might well coincide with a drop in
the value of the dollar. In that case, the currency gains
on IGR’s portfolio might offset its interest-rate related
losses."

"That’s a tidy theory," your editor countered, "but what if
you’re wrong?"

"Well if I’m wrong," said the voice, "I’ll probably lose
money."

"Fair enough," your editor concluded. "And even if IGR
doesn’t make money for you, it’ll allow you to lose money
much more creatively than most of your friends…thanks for
the idea. Let’s talk again in ’06."

After hanging up the phone, we took a closer peak at IGR.
The fund market’s itself as "a global portfolio of public
real estate companies which are in the business of owning,
operating, developing, repositioning, acquiring and selling
commercial real estate properties" At the current quote,
the fund sells for about a 14% discount to its net asset
value and yields almost 8%.

"Many of the fund’s holdings are all but impossible for
U.S. investors to purchase on their own," writes Jonathan
Hoenig, managing member of Capitalistpig Hedge Fund LLC.
"For example…the second biggest (3.9%) component of the
fund is shares of Wereldhave, a European-based property
company that isn’t available to U.S. investors as an
American Depository Receipt, or ADR. The firm boasts
extensive property holdings in Belgium, France, Finland,
the Netherlands and Spain, among others. It’s a similar
story with the fund’s No. 1 position, at 4.7%, shopping-
mall owner Westfield Group, which is the largest retail
property owner in the world, yet doesn’t trade in the U.S.
The company’s portfolio includes 124 shopping centers in
Australia, New Zealand, and the U.K., as well as in the
U.S.

"IGR offers exposure to an asset class not readily
available to most U.S. investors," Hoenig continues. "With
the exception of the Alpine International Real Estate
Equity Fund (EGLRX), which we profiled two years back,
there have been few opportunities for U.S. investors to
gain exposure to international real estate."

While your editor cannot vouch for IGR’s investment
strategy or the expertise of the fund’s management, he can
observe that the timing of the fund’s launch seems to have
been fairly propitious. For one thing, IGR has handily
outperformed most U.S.-based REITs. From inception to date,
it has produced a total return of about 25%, or about twice
the return of comparable U.S. REITs. The dollar’s drop in
2004 clearly deserves most of the credit for IGR’s strong
performance.

But IGR’s launch was timely for another reason as well: The
REIT sector is booming worldwide, providing the fund’s
management team with an ever-expanding – and tax-advantaged
– array of investment candidates. Since REITs do not pay
taxes at the corporate level, shareholders receive more of
the corporate cash flow than shareholders in a traditional
corporation.

According to Ernst and Young, 20 countries or territories,
as geographically diverse as Brazil, Malaysia and Turkey,
have recently passed laws allowing REITs. "The EPRA/Nareit
Global Real Estate Index now tracks over 250 publicly
traded real estate companies in those 20 countries, plus
the U.S.," the Wall Street Journal reports.

If the U.S. dollar continues falling, we would expect
almost all of the foreign REITs in these 20 countries to
produce a higher return than most U.S. REITs. On the other
hand, if U.S. interest rates continue rising, we would
expect interest rates to rise in most other countries as
well…and we would expect the shares of most REITs to
fall, whether they are buying property in Paris or Peoria.

In short, buying foreign real estate stocks might not be
the best way to hedge against a dollar decline, but it’s
probably not the worst.

Did You Notice…?
By Eric J. Fry

There’s more to the U.S. stock market than IBM and Cisco
Systems.

Nor does the list of quirky foreign investments begin and
end with foreign equity REITs like IGR.

The Macquarie/First Trust Global Infrastructure/Utilities
Dividend and Income Fund (MFD) also deserves a spot on the
list.

"Rarely do you see a utility-related product that doesn’t
hold the obligatory position in U.S. giant Southern Co.,"
money manager Jonathon Hoenig correctly observes. "Only 38%
of the fund’s assets are held in U.S. stocks, with the
majority of equity exposure coming from international
names, such as the U.K.’s AWG or GasNet Australia Group,
both of which are unavailable to U.S. investors as ADRs.
Moreover, the fund’s utility exposure is paired with a 27%
position in commodity-sensitive Canadian income trusts such
as Northland Power Income Fund and UE Waterheater Income
Fund, both of which don’t trade in the U.S. The portfolio
is rounded out by a hefty 31% exposure to senior loans from
infrastructure-related companies in industries such as
telecom, health care and cable TV."

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And The Markets…