In recent years, U.S. equity Real Estate Investment Trusts (REITs) have grown their interests in real property outside the United States, and both opportunities and challenges are associated with such expansion, according to Fitch Ratings in a new special report. Fitch-rated equity REITs owned over $8 billion in properties in international markets as of March 31, 2007, compared to less than $2 billion five years earlier, according to Fitch estimates. As REITs continue to evaluate overseas acquisition and development opportunities, they will need to carefully weigh numerous factors, according to Fitch.

In the special report, 'U.S. REITs Broadening Their Horizons,' Fitch states that overseas expansion opens new avenues for potential long-term profitable growth and increases operational and geographic diversity. 'Incentives for REITs to invest in real property outside the United States include a wider and more diversified tenant base, greater variety of earnings and, ultimately, the potential for stronger downside protection for senior unsecured bondholders and preferred stockholders,' according to Steven Marks, Managing Director and REITs Group Head.

In addition, potential benefits of expanding into international markets include the establishment of strategic alliances with an array of investors, and the generation of various fee income streams such as asset management and development fees.

In the special report, Fitch also notes that investment in unfamiliar markets exposes REITs to risks not otherwise faced when investing domestically. REITs expanding into international markets must manage foreign currency exchange risks and also consider changes in foreign political environments, compliance with a wide variety of foreign laws, different lending practices, and obstacles to the repatriation of earnings and cash. 'Fitch is mindful of the many risks associated with international expansion and the potentially negative impact such activities may have on REIT credit profiles,' said Marks.