Living in Southern California, it is easy to forget that there are other real estate markets, and even more so that anybody would want to invest in them, especially when said properties are overseas, halfway around the globe.

But US investors are, in fact, going offshore like never before. In 2000, US real estate investors put a little more than $5 billion into European properties. By 2006, however, that level had jumped fourfold to more than $20 billion. And the curve looks to be getting steeper. "Economic growth worldwide has been strong, especially in Asia," explains Delores Conway, director at the USC Lusk Center for Real Estate. "Those strong growth rates attract capital. Moreover, everywhere there is too much capital looking for a home, looking for returns. Real estate offers security, and returns, and the ability to leverage. And, if you are in the US markets, you also want to diversify."

So much capital has crisscrossed borders that the search for higher, double-digit "cap rates"--a reason sometimes cited for buying foreign property--is like hunting for wooly mammoths, at least in a country attractive to institutional capital.

According to a study released in March by Rreef Research, cap rates are becoming homogenized, and globally. In 2000, average cap rates on office space in the US were above 8%, while the same rates were below 6% in Europe, according to Rreef. Since then, the large movement of capital into real estate has depressed cap rates worldwide, but also compressed international cap rates into a small zone between 5% and 6%. Indeed the only outlying major city today is Moscow, where cap rates soar north of 10% largely due to perceived risk. Tokyo is the lowest, with cap rates under 4%. But the rest of the developed world is bunched up around 5% to 6%.

But, watching investment flows is sometimes like watching ocean liners. Once an asset class gains favor, the money tends to keep pouring in, even after the fundamentals have shifted. And besides, professional investors usually believe they can out hustle the average player and deliver stellar returns despite a flatter global investment landscape. In the real estate world, hardly a day passes anymore without an announcement of a major US private equity fund, pension fund or institutional investor making a move to acquire offshore properties.

Some recent examples:

• San Diego-based Westcore Properties acquired a three-building portfolio in Vienna for $108 million in April. The company said the purchase "demonstrated our desire to become a major player on the European real estate stage."
• Following an Indian rule change in 2005, which allowed foreign investors to own up to 100ƒ of construction projects, New York City -based Tishman Speyer formed a joint development company with ICICI Venture Funds of Mumbai, endowed with $600 million in equity from the two partners. Projects up to $2.5 billion in value may be financed, and several are under way. The entire nation of India has about 15% of the office space in just New York City, but is becoming the call center capital of the world.
• Additionally, New York City-based developer Vornado Realty Trust has teamed up with the venture-capital outfit Chatterjee Group to build information technology parks in Indian cities such as Bangalore, Hyderabad and Navi Mumbai. A new fund is raising capital.

While the investment herds may be headed to Europe or elsewhere offshore, there are risks in buying in markets not always so easily understood by Americans, says Robert Stamm, managing partner recently of Germany, now of Los Angeles for CBRE.

"The cap rates are getting super aggressive in Germany," Stamm says. "American buyers are much more aggressive in their assumptions [of future rents and values]...in one case, I watched a Texas investor pay 20% more than the highest German bidder for a portfolio of non-performing loans.

"It was really a crummy portfolio," Stamm recalls of the early 2007 transaction. "But they paid 70 cents on the dollar for it."

Don Ankeny, president and CEO of Westcore Properties, concurs. "The risks of buying real estate are magnified overseas, whether it be property taxes, transfer fees, foreign exchange issues, income tax issues...my personal feeling is that you need higher returns to justify that risk." There is no set figure, but Ankeny says roughly 200 basis points of better annual return might be the right number needed to balance offshore risks.

Some even warn US investors against taking foreign partners, though having partners might seem wise, given local complexities. Says one expert: "The problem with local partners is that once you are halfway in, they sometimes want to re-cut the deal, or threaten to walk out."