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In many ways, it was the bursting of the U.S. real estate market that drove the global economy into the “Great Recession.” And having been burned badly by the collapse in real estate prices, most investors have avoided U.S. real estate like the plague.

But, as is often the case in the investment world, going against the grain can pay off surprisingly well. While pundits argue whether the U.S. real estate market has, in fact, bottomed, savvy investors are making a big picture bet that, yes, the U.S. housing market is recovering. That’s why in 2012, real estate stocks have been among the top performers in the U.S. stock market.

Yet, as well as the U.S. real estate sector has done this year, foreign real estate stocks would have put even more money in your pocket.

More importantly, foreign real estate stocks are likely to continue to outperform their U.S. counterparts for some time to come.

The Big Picture Case for Investing in Foreign Real Estate

U.S. financial headlines focus on the state of the property market in New York, San Francisco, Miami and Las Vegas.

Yet, if you take a global perspective, you get a very different view of the real estate market.

In 2011, the Knight Frank/Citi global real estate survey asked investors which cities on the planet offered the best investment prospects between now and 2020.

And the U.S. occupies a much less prominent position than you might think.

Nor does the picture look any brighter for the United States in the coming decade.

According to Knight-Frank/Citi, global investors still expect New York and London to remain the top two global real estate markets between now and 2020.

But the smart money also predicts all other U.S. cities, such as Washington, D.C., and San Francisco, will tumble in the rankings. Among U.S. cities, only New York is expected to remain in the top ten globally. Washington, D.C., Los Angeles and San Francisco are expected to fall to between #15 and #20.

How to Invest in Foreign Real Estate

Until recently, global real estate was an exotic asset class, off the radar screen of U.S. retail investors. Information about foreign real estate plays was scarce. And few, if any, global real estate stocks are listed on U.S. exchanges.

That all changed with the advent of global real estate exchange-traded funds (ETFs) such as Vanguard Global ex-US Real Estate ETF (VNQI), a current recommendation in my investment service, The Alpha Investor Letter.

VNQI replicates the S&P Global ex-U.S. Property Index, a benchmark that includes real estate investment trusts (REITs) and real estate operating companies (REOCs) in emerging and developed markets outside of the United States.

When you invest in VNQI, you invest in 440 individual securities from 35 different markets, including Japan, Hong Kong and the United Kingdom.

Coincidentally, VNQI’s regional allocation pretty much tracks the composition of Knight Frank/Citi study’s top ten cities list. The Knight Frank/Citi study found that six out of the top ten cities for real estate are based in Asia. That just about matches VNQI’s 56% weighting in the region. VNQI’s 20.7% weighting in Europe correlates almost exactly with London and Paris, which both are in the top ten.

Harvard’s Top-Performing Investment of 2012…?

Although foreign real estate is not an asset class you probably invest in, some of the smartest money in the world does — including Harvard University.

At my investment firm, Global Guru Capital, I run the “Ivy Plus” Investment Program — an investment strategy that replicates the asset-allocation strategy of the Harvard University endowment. The program invests in a wide range of asset classes that you normally would never think of, including hedge funds, timber and private equity. And yes, it even has a 2% allocation to foreign real estate.

Among 17 asset classes in which the program invests, which one has been the top performer of 2012?

The S&P 500 versus VNQI

You guessed it… it’s foreign real estate, which is up 29.81% in 2012.

And if the Knight Frank/Citi survey is right, this bull market is just getting started.

To keep up on the latest investment activities, check out Eagle Daily Investor, where my e-letter appears each week. To read my e-letter from last week, please click here.

Sincerely,

Nicholas A. Vardy
Editor, The Global Guru