Highlighting International Real Estate ETFs

By Brandon Clay

We Americans live in interesting times. On the one hand, our new Camelot-like president has raised the hopes of millions. On the other hand, we’re in the most challenging economic environment of our generation. Two victims of the meltdown have been real estate and the dollar: real estate because of all the overvalued properties, the dollar because of government spending.

This may lead you to disregard any investment containing the words “real” and “estate.” It may also lead you to think all investments are bad right now. Yet while the real estate market is suffering here, there can still be opportunity abroad.

Broad-based international real estate ETFs could continue to do well despite the stateside economic situation. iShares FTSE EPRA/NAREIT Developed Real Estate ex-US (IFGL) and SPDR Dow Jones Wilshire International Real Estate (RWX) are the most actively traded and both have done very well over the last several weeks.

International real estate has been spurred on by the emerging markets. Claymore/AlphaShares China Real Estate ETF (TAO) sits atop our current All Star Investor sector rankings, partly because of China’s recent decision to relax commercial financing requirements. Before the regulation change, Chinese developers had to front 35% cash before financing was approved. Now banks only require 20% down. This change should spur more development in the world’s fastest-growing economy.

Dividends are also attractive in real estate funds. Granted, you’ve had to endure shell-shock from declining share prices in recent years. But people still need a place to sleep - and businesses still need a place to conduct business - even overseas. Rents keep investors happy. In addition, international real estate is not priced in dollars. Even if international real estate stagnates, ETFs like IFGL and RWX could still appreciate as the dollar falls.

Like many other sectors, international real estate found a bottom in early March. Since then, it’s been on a tear up the charts. One reason we’re highlighting this sector is the recent breakout above resistance. You’ll notice that the chart has several gaps. International ETF opening prices reflect the fluctuations while the US market is closed - so don’t draw too many conclusions from the price gaps.

click to enlarge

IFGL 6-Month Chart

There are currently seven international real estate ETFs. Those mentioned above have the best trading volume and liquidity. Other possibilities are iShares FTSE EPRA/NAREIT Asia (IFAS) and iShares FTSE EPRA/NAREIT Europe (IFEU), both of which focus on specific geographical areas while iShares S&P Developed ex-US Property (WPS) and WisdomTree International Real Estate (DRW) have broad international exposure.

Disclosure: no positions

Comments

[RiskReturnO...:]

TAO has great potential for further appreciation as it contains the biggest, most liquid Hong Kong property / real estate companies.

For those familiar with Hong Kong, wealth is often measured in land and apartment. Residents love to "stir fry" (translates to speculate) in apartments / property. Ultra-low interest rate (since HK$ is pegged to US$, interest rates tends to follow US) provides the necessary fuel to drive the market up.

Additional value drivers include: expansion of property investments into mainland China, and potential opening up of Taiwan property market to China/HK based real estate firms.

Volume is increasing, while price action has been very bullish. 50 day EMA has crossed the 200 day MA on strong conviction. Look for any pullback as great entry point for starter position. (Perhaps something might happen on June 4th -- 20th anniversary of Tianamen Square event ... would let those who missed out on TAO get in for the next phase of the rally!)

Jun 01 07:58 PM

[Alan Young:]

In other words, since the US real estate bubble has popped, we should now go jump on the next bubble, conveniently provided by China's decision to pursue a similar policy of encouraging more leverage?

Jun 02 10:34 AM

[Ron Rowland:]

Why not? Bubbles are a great way to make a lot of money. Enjoy the ride up, but be prepared to eventually sell. Bursting bubbles (they typically deflate rather quickly but seldom truly burst) usually only hurt the very late comers and those that refuse to sell.

Jun 02 11:47 AM

[klarsolo:]

The opportunity of real estate in China is clearly there, but the uncalculatable political risk necessitates a prudent / small weight of such assets in your portfolio unless you don't mind a wild ride.

Jun 02 11:50 AM

[tjmmz9843:]

THANKS for this article. I was wishing for an article on international real estate, just last weekend!

Can you say more about what IFGL and RWX invest in? (i.e., rough allocations by country/continent, and by type of property) Also, what do you think of FIREX?

Last weekend I started to search very very briefly on FIREX, RWX and DRW, and at least one of them had a surprisingly high U.S. allocation, which might defeat the goal of getting out of the dollar. (I wish I could have put some time into my search, but I was looking at a lot of things.)

Jun 02 01:49 PM

[utilitus:]

Using more instinct than expertise, I've been building a pretty big position in the Alpine product AWP. It's not a REIT but closed end fund, mostly holding international securities in "a favorable balance among three pillars of real estate value – Premier Property Owners, Premier Property Developers, and Premier Property Financiers/Investors.". It is flexibly currency hedged, a key point given my dire view of the US$, and RE is of course an inflation play. It was down maybe 90% since it's ill-timed introduction in 2007, and I'm up about 70% in several months while its' yeild has devolved from 15% to 8.5% now. Recently, it's behaving rather well on both up and down days.

Also, this morning, inspired by something someone said on CNBC World overnight, bought a bit of China Housing & Land Development (CHLN), only to find that is was up 23% half an hour later (now up just 13%). The dollar is doomed, so leveraged Forex trading is my new frontier, and I'm planning to buy a nice house in Mexico.

Jun 02 02:47 PM

[Ron Rowland:]

tjmmz, RWX, DRW, and FIREX are all international (global excluding U.S.), although by prospectus they probably allow a modest amount of US exposure.

There are a few "global" real estate ETFs too which do include US holdings (RWO, GRI, FFR), but I purposely excluded them from this article.

You can get more information on anyone of them at the sponsor's website. Once there, type in the ticker symbol and then look for the fact sheet.

Jun 02 06:40 PM