WASHINGTON, DC-Specific factors such as the Moody’s sovereign debt credit rating, land use controls and property rights are critical to determining if foreign real estate investments are worth pursuing, according to a new study by Starwood Capital Group and Rosen Consulting.

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.

Want to continue reading?
Become a Free ALM Digital Reader.

Once you are an ALM digital member, you’ll receive:

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications

*May exclude premium content
Already have an account?


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.



Join GlobeSt

Don't miss crucial news and insights you need to make informed commercial real estate decisions. Join GlobeSt.com now!

  • Free unlimited access to GlobeSt.com's trusted and independent team of experts who provide commercial real estate owners, investors, developers, brokers and finance professionals with comprehensive coverage, analysis and best practices necessary to innovate and build business.
  • Exclusive discounts on ALM and GlobeSt events.
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com.

Already have an account? Sign In Now
Join GlobeSt

Copyright © 2023 ALM Global, LLC. All Rights Reserved.