Ibbotson Associates (part of Morningstar) last month completed a study sponsored by NAREIT about the role of real estate investments in global mixed-asset investment portfolios. One particularly interesting piece is their analysis of the interaction between currency movements and returns to U.S. investors from international REIT holdings.
During the 20 years 1990-2009, when the U.S. dollar was falling against the Japanese yen, average total returns to U.S. investors were 12.1% per year in U.S. dollars for investments in Asian REITs (and other Asian listed property companies). Most of that return, though, was from currency movements: specifically, U.S. investors in Asian real estate got 10.4% from currency and just 1.7% from the REIT holdings themselves.
Similarly, when the U.S. dollar was falling against the Euro, average total returns were a magnificent 20.1% per year for investments in European REITs (and other European listed property companies); again, though, most of the return was from currency movements: U.S. investors in European real estate got 11.2% from currency and just 8.9% from the REIT holdings.
When the U.S. dollar was rising against each of the other currencies, the situation was largely reversed: average total returns to U.S. investors were 10.5% per year in U.S. dollars for investments in Asian REITs and -1.7% per year for investments in European REITs. This time, of course, currency movements were the drag, not the boost: specifically, U.S. investors in Asian real estate got 19.1% from the REIT holdings themselves but lost 8.6% from currency, while U.S. investors in European real estate got 6.8% from the REIT holdings but lost 8.5% from currency.
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When they combined periods of rising and falling currency, Ibbotson found that the compound average total return was 6.18% per year in U.S. dollars from investments in Asian REITs (though only 3.89% in yen) and 4.93% per year in U.S. dollars from investments in European REITs (only 3.97% in Euros).
International REITs have a fairly low correlation not only with U.S. stocks but also with U.S. REITs. The correlation between Asian REITs and North American (mostly U.S.) REITs over the same period was 58%, and the correlation between European REITs and American REITs was 60%; meanwhile, Asian and European REITs had correlations of 50% and 37% with U.S. large-cap stocks, and 64% and 43% with U.S. small-cap stocks. Still, given the fairly low average and high volatility of their returns in U.S. dollars, Asian and European REITs ended up with very small shares in historically optimal portfolios for U.S. dollar investors.
Disclaimer: The opinions expressed in this post are my own and do not necessarily reflect those of the National Association of Real Estate Investment Trusts ((NAREIT)). Neither I nor NAREIT are acting as an investment advisor, investment fiduciary, broker, dealer or other market participant, nor is any offer or solicitation to buy or sell any security investment being made. This information is solely educational in nature and not intended to serve as the primary basis for any investment decision.
Disclosure: I am long Vanguard REIT Index Fund.