For years, fast-growing markets such as Shanghai and Istanbul were the best answer to most international investment questions. Now, as various parts of the world economy keep exploding or imploding, it's not so simple.

These days, the gyrations of everything from the debt markets to currencies to commodities have made the international game much more complicated for U.S. investors. “It's a tricky time in the global real estate cycle,” says Simon Mallinson, head of U.S. client services for IPD, a global real estate advisory service.

Until recently, the popularity of such blue-chip markets as the London office sector drove cap rates so low that investors looking for returns that beat government bonds had to look elsewhere. And they could find what they were looking for easily. Why stay in London for a 4.5% yield when cap rates in Moscow are running 18%, especially since Russian government bonds are trading within a few basis points of U.S. bonds?

But after a year in which London office sale prices fell by as much as 10%, it's now possible for investors to earn cap rates of 6.75% in exclusive areas such as the City, the old financial center. That brings cap rates within shouting distance of the 8% investors earn today in Moscow, or the 7.5% that can be had in Istanbul.

“It's a relative bargain,” says Steve Collins, managing director of the international capital group for Jones Lang LaSalle — assuming of course that prices have hit bottom.

Japan on radar screen

Tokyo now looks like a similar opportunity for office investors. With cap rates ranging from 3.5% to 4.5%, the Tokyo office market might not sound too exciting, but given the fact that Japan's 10-year government bonds yield 1.5%, it's actually not so bad.

At 3.5% or 4.5%, the Tokyo landlord is earning 200 to 300 basis points over the local risk-free rate, compared with a range of 50 to 150 basis points in the European markets. Add to this mix some fairly reasonable growth assumptions, and the market looks attractive compared with the European or U.S. markets, says Mark Roberts, head of real estate investment research for Invesco Real Estate.

Of course, the fact that rising cap rates in the First World are attracting real estate investors doesn't mean that there aren't any opportunities in the developing world. In China, for instance, urban migration combined with a growing middle class is creating a vast demand for residential property, Roberts says.

Closer to home, Collins is enthusiastic about opportunities in Mexico, where home mortgages are becoming available to Mexicans for the first time. “They need places to live, they need places to shop, they need places to eat and they need places to work,” he says.

Jumping back in

Given the amount of bad news in the world's real estate markets lately, however, it may be more difficult now for investors to dive into a new market with quite the same aplomb they displayed a few years ago.

One lower-risk way to do it might be through derivative contracts on countrywide property indexes. The “d” word may make many U.S. investors flinch just now, but Mallinson says European investors are increasingly enthusiastic about these over-the-counter contracts, which they have built into a $35 billion to $40 billion market. Right now, the contracts on the British, French, and German property markets are the most mature, but others are developing as well.

Listed securities are an even easier way to enter the market, and offer their own set of opportunities now that so many investors have fled. Steve Carroll, managing director of global REIT management operations for CB Richard Ellis, believes that the market is too sour on Singapore-based REITs, which now trade as much as 20% below their intrinsic value.

On the other hand, staying home may be the best idea of all. While the U.S. dollar seems to be recovering, it's weak against many currencies. Some of the best opportunities might be in the U.S. Mallinson forecasts the type of infrastructure deals that have attracted U.S. investors overseas in the past few years will be coming soon to a pothole near you.

Bennett Voyles is a veteran commercial real estate reporter and NREI's Paris correspondent. For questions or comments, readers can e-mail him at benvoyles@yahoo.com.