For a capital-intensive asset class such as commercial real estate, the impact of tighter debt has been swift and significant. Transaction volumes in both the US and the UK have fallen. Prices for commercial buildings have retreated 10 per cent or more from the frothy first half of last year. For the past four months the UK IPD index registered the first negative returns since June 1991. US real estate investment trusts (reits) have also fallen in value by 20 per cent in 2007. UK reits have fared even more poorly (-38 per cent) in their inaugural year.

Yet, these headlines are only part of a much larger story. The bigger picture would show that commercial real estate is now a global asset class – just like stocks, bonds, and private equity. While the US and the UK have hit an air pocket, real estate markets in Latin America, Asia and eastern Europe are still climbing. The diversity of commercial real estate markets in these countries means that the ripple effects of credit tightening are felt quite differently in cities around the world.

For example, securitised “conduit” debt accounted for more than 60 per cent of the commercial real estate mortgage market in the US during the first half of 2007. That market is now effectively shut. But, in countries as diverse as Canada, China, Japan, Mexico, and Russia, such lending was a minuscule part of commercial real estate finance. In many developed markets, ample debt is still flowing from “portfolio lenders”, such as life insurance companies and banks, who originate and hold the mortgages they issue.

Many countries enjoy strong real estate fundamentals, boosted by commodity-rich economies (Australia, Brazil, Canada and Russia) or by rapid urbanisation and an emerging middle class (China, India, Mexico and Turkey). Once these new professionals secure their first jobs (in new office buildings), they buy their first cars and go shopping.

The goods to stock the shops need to be warehoused in modern logistics centres. The international business people travelling to open these markets need hotel rooms to stay in. The result of this burgeoning demand: a highly profitable commercial real estate market.

In short, Anglo-American investors who clung to the idea that real estate only works as a domestic asset class are the ones who suffered the most in 2007. Looking back at the razor-thin (or negative) spreads between commercial real estate yields and the risk-free rate in the US and UK, it is clear that a price correction was needed.

Fortunately, the two largest and most transparent real estate markets in the world can take their lumps and move on quickly. Eventually, repriced real estate in London and New York will look like good value again. After some creative destruction, weaker players will be forced to leave (especially highly-leveraged buyers) and better-capitalised successors will drive pricing and deal flow.

For 2008, there is still plenty of time to diversify into international real estate. The major cities of India and China are not going to be built out in five or even 10 years. Moreover, emerging market real estate investing is hard work.

“Low transparency” is a euphemistic description of the difficulties in markets that have recently opened up to foreign capital. Asia-Pacific markets such as Hong Kong, Singapore, Seoul, Sydney and Tokyo are more investor-friendly.

The prudent approach is to build a balanced international real estate portfolio over time. It should include emerging market positions alongside more mature markets like Australia, Germany, Japan and Scandinavia. These positions can be in listed real estate securities and closed-end funds. International real estate markets are now more transparent and open to cross-border capital than ever before. Some countries are in the midst of an upward growth cycle (rising rents, take-up of space and development). By contrast, Anglo-American markets will be most affected by the credit squeeze. We see 2008 shaping up as a year when low-leverage capital will displace highly leveraged owners and buyers in both the US and the UK. The year ahead will also be a good time to get started on an international approach to commercial real estate.