Diversify Your Portfolio With Exposure to Global Real Estate
BY JUSTIN KUEPPER
Real estate investment trusts (REITs) are a great way for investors to diversify their investment portfolios. While REITs originated in the U.S. and Australia, international REITs have sprung up around the world offering investors access to new and exciting markets. International investors looking to diversify their stock portfolios may, therefore, want to take a look at these securities.
In this article, we will take a look at international REITs and why investors may want to consider them for their portfolios to diversify risk and potentially enhance returns.
What Are REITs?
Real estate investment trusts (REITs) are companies that own and most often actively manage income-producing commercial real estate. In addition to owning this real estate, some REITs also invest in loans and other debt obligations that are secured with real estate collateral. Most large REITs around the U.S. are publicly traded entities on stock exchanges.
Often times, REITs receive special tax advantages that enable them to avoid corporate tax, as long as they distribute the overwhelming majority (90%+) of their income to investors. It’s worth noting that, despite avoiding double taxation, the structure doesn’t mean that a REITs tax losses are passed on to investors for use as carry-forwards or to offset capital gains.
Why Invest in REITs?
There are many benefits to investing in REITs both domestically and internationally. For instance, Ibbotson Associates, the investment research arm of Morningstar, found that ownership of REITs over time has historically increased investors’ total return and/or lowered the overall risk in both equity and fixed income portfolios.
For U.S. investors, international REITs offer even greater diversification in many cases, given that the real estate isn’t tied to the U.S. market. For international investors, REITs have low correlation coefficients with their respective country’s domestic market, too. Combined, these attributes make international REITs a great option for diversification.
International REITs 101
International REITs now account for the majority of REITs worldwide, after their successful debut in the U.S. and Australia. These securities offer numerous advantages and disadvantages but may compliment most diversified international portfolios.
International REITs offer many advantages to investors, including:
- Inflation Hedge – Real estate is widely considered to be an inflation hedge, since it tends to build value over time, despite secular currency depreciation.
- Strong Dividend Yields – Many REITs offer attractive dividend yields because tax laws require that companies distribute the majority of their income.
- Conservative Management – Since REITs must typically distribute their income to investors, management has less money to spend on costly pet projects.
- Diversification – REITs are a great way to diversify an existing stock portfolio via both an asset class and geographical differences.
Despite their positive qualities, there are many risks to investing in international REITs, including:
- Political Risk – Land rights and taxation can be hot-button political issues in many countries around the world where real estate is less developed than in the U.S.
- Currency Risk – Exchange rates can significantly affect any foreign stocks, but especially REITs, given the large dividend distributions that are typically seen.
- Taxation Risk – REITs in foreign countries can be extremely tax inefficient, particularly if the investor is taxed at ordinary income rates.
- Liquidity & Transparency – International REITs can be very illiquid and opaque, which can pose many risks to investors, especially those with short-term time horizons.
The Best Ways to Invest in REITs
The easiest way to invest in international REITs is through the use of exchange-traded funds (ETFs). Notably, many of these ETFs do not offer dividend yields, but rather capital gains potential from the reinvestment of any dividends. As a result, income investors may be better off selecting specific REITs to purchase that offer attractive yields.
The most popular international REIT ETFs include:
- SPDR Dow Jones Global Real Estate (RWO)
- WisdomTree International Real Estate (DRW)
- SPDR Dow Jones International Real Estate (RWX)
- iShares S&P Dev ex-US Property (WPS)
- iShares FTSE EPRA/NAREIT Dev Real Estate (IFGL)
The Bottom Line
International REITs are a great way to diversify a portfolio and build exposure to real estate markets around the world. Often times, the best way to invest in international REITs is using ETFs, since they are traded on a U.S. exchange and provide greater liquidity than individual foreign REITs.