By Peter Slatin

Cheap money has been a boon to real estate buyers across the board if not to the distinction among various grades of investment property. Now, for some cheap money may be getting even cheaper due to the decline of the dollar.

We have always welcomed foreign investors into our property markets, and even when the Dutch, British or Germans were at a slight currency disadvantage, they heartily endorsed the American real estate product, voting with institutional fervor. Today, they can add a hefty 30 percent-plus depressed-dollar discount to that enthusiastic embrace. Add in the benefits to overseas REIT investors included in the 2004 American Jobs Creation Act, and something new and different is afoot for the overseas fund manager: choice.

For the first time, investors based outside the U.S. will be able to choose between their more traditional pattern of direct investing and the U.S. REIT market, where they can be rewarded with an instant, often impressive yield. Some overseas fund managers will no doubt be quicker than others to realize that they can forgo the headache of managing properties in favor of choosing an in-place management team—one with the transparency and public accountability afforded by U.S. securities law—in order to get at that yield.

The continued weak dollar is likely to play an additional, if somewhat limited role in helping to prolong the current REIT winning streak. Yes, REIT shares represent compelling discounts for euro-backed investors, especially those more concerned with showing a return on their balance sheets than with displaying a sparkly U.S. building on a brochure. But for those of us with mere dollars to invest, it’s important to remember that REIT shares will continue to benefit from ongoing competition over buildings (sparkly and otherwise) that will include foreign buyers. An anticipated boost in interest rates by up to 100 basis points will place pressure on the aggressive private-equity investment market, making REITs more competitive. In 2004, according to Cushman & Wakefield, that stiff competition meant that REITs accounted for just 13 percent of the $14.3 billion in acquisition activity in New York City. Backed by strong equity values, though, and bolstered by an increase in foreign investment, REITs could be positioned to be more competitive as rates rise.

Each of these direct relationships between overseas investors and domestic real estate practices indicate that the falling dollar could actually become a force for positive expansion for REITs in 2005. But the greatest influence that low-priced U.S. currency may have in contributing to ongoing REIT strength is through its magnetic call to foreign citizens to simply come here to spend money. Tourist and business travel will directly benefit the hotel industry. And though the year-end holiday shopping season arrived just as Europeans were beginning to flex their shopping muscles, any carryover from that through the spring and summer should have positive repercussions beyond the retailer to the landlord.

In short, there is almost no question that a weak dollar could help prolong the current REIT growth trend. Increased equity investment from overseas combined with increased spending on lodging and retail all provide positive indications for strength in the sector. Rising interest rates will cause some weakness as investors move to growth stocks, but will also force private equity buyers to step back from aggressive buying. The big question, instead, is how aggressively overseas investors will move to take advantage of this opportunity.