The study, announced at Starwood's Global Property Forum, aims to determine what yields are appropriate for investing in foreign real estate, when real estate investors are just beginning to figure out ways to do comparisons between countries.
The study determined "hurdle" yield rates that investments must clear for them to be economic to investors. These rates ranged from 15.9% for several Western European countries to 35.4% in Russia. Several East Asian countries have estimated hurdle rates of 30 to 35%. They compare with an average yield of 20% in the United States.
"Many of these countries, without a value-added angle, will not give you a higher return," says Brad Dockser of Starwood Capital. On the other hand, it also explains why some European investors, such as those from Germany or the United Kingdom, are racking up frequent flier miles. "They go anywhere else, they're getting a higher return."
The study created a mathematical model of foreign investment based primarily on two equations--one to represent economic risk, and a second to represent asset-class risk. Political and currency risks were also included in additional equations, although Starwood officials say they use hedges to eliminate currency risks entirely for their deals.
The model required creating indexes to quantify certain subjective elements, such as the strength of property rights, and the rigidity of land use controls. In so doing, the model can also illustrate how changes in specific conditions can change investment risk for better or worse.
Factors like the sovereign debt credit ratio, trade policy index and exchange rate volatility account for 60.5% of the economic risk in offshore investing. Factors such as land use controls, property rights, current accounts index and treasury spreads account for 70% of the asset-class risk in offshore investing.
Other cultural factors don't quantify well, however. Barry Sternlicht, Starwood's chairman and CEO, described how Asian countries have an "edifice complex."
"You see all these tall buildings in rice paddies. We called it Houston on steroids," he says. What wealthy families do in Asia, however, they don't do in Europe.
"I don't know how you put that into a model. You don't have that same cultural dispensation in Europe," he says.
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