By: Robert J. Gordon, MBA, CFP®
International real estate investment trusts (“REITs”) represent an excellent opportunity to extend your portfolio’s diversification and potentially increase long term returns.
The U.S. Congress created REITs in 1960 to give anyone and everyone the ability to invest in largescale commercial properties. The REIT has been widely-accepted by U.S. investors as a way to gain access to the real estate investment market. REIT success is spreading rapidly as fast growing international economies adopt or create similar investment structures. At last count, twenty-two nations had approved the creation of REITs or REIT-like investment vehicles and several other countries are considering them. The global real estate securities market today represents more than $900 billion of equity capitalization and is growing rapidly.
Perhaps the most compelling reason for the inclusion of commercial real estate in an investment portfolio is its low correlation to other asset classes and low correlation to the larger stock/equity markets. This attribute makes global REITs an excellent diversification tool and can serve to lower risk at all return levels. It is essentially an opportunity for investors to get more return for every unit of risk they accept.
Related to their diversification potential is the fact that REITs are an alternative and separate asset class. The factors that explain performance of the stock markets do not explain the performance of publicly-traded REITs. This fact makes REITs highly desirable as investors seek attractive investment opportunities outside of the traditional stock/bond universe.
Real estate has long been one of the world’s most reliable stores and creators of wealth. A recent study by Dimensional Fund Advisors (“DFA”) found that non-U.S. REIT returns over the last 15 years were almost 14% per annum.1 These are healthy returns for any market. Of course, past performance is no guarantee of future results. Growing economies around the world are seeing unprecedented investments in construction to support their commercial ambitions and increased urbanization. REITs and REIT-like investments are helping them to find the money for that growth.
Ease of Use
Prior to the introduction of REITs, investing in real estate was cumbersome and out of reach for all but the most sophisticated and wealthy investors. REITs and REIT like structures expand access to the average investor and, simultaneously, provide the commercial real estate sector with another source of capital.
The populations of most developed countries are aging which is increasing the demand for investments that produce relatively high current yields. REITs and REIT like structures typically pay out a substantial percentage of their taxable income to shareholders annually in the form of dividends.
What this means for you
International real estate belongs in a well-diversified portfolio. Global acceptance of the REIT structure is increasing access to previously inaccessible but highly desirable countries. It is also facilitating the development of robust financial products that offer the average investor exposure to this important asset class. End result, you get the opportunity to become a sophisticated, international real estate investor without ever having to pick up a plunger!
1International Real Estate Investment Trusts by L. Jacobo Rodriguez, Dimensional Fund Advisors Quarterly Institutional Review