As U.S. Real Estate Gets Expensive, 7 International REIT Markets Hold Alternatives

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Includes: ACDSF, AMT, AMZN, BRLAF, CPAMF, JREIF, KLPEF, LSGOF, NBFJF, RIOCF, SPG, STGPF, UNBLF, VNQ, VNQI, WEFIF
by: Tariq Dennison

Summary

US REITs look expensive compared with Australia, Britain, Canada, France, Hong Kong, Japan, and Singapore on Div Yield and P/B measures.

VNQI provides easy and scalable exposure to foreign real estate, but includes property developers as well as REITs, and is not currency hedged.

As important as it is to diversify stock portfolios across sectors and countries, so it remains important to diversify REIT allocations to foreign markets to reduce risk and increase yields.

Real estate is and should be, quite literally, a cornerstone of most investment portfolios. We all need space to live, land on which our food is grown, and urban life runs on commercial and industrial property where city dwellers work, shop and play. Owning property and collecting rental income is one of the simplest and most tangible inflation-indexed investments for many investors to understand, especially in Asia, which is why I find it surprising that even index giant Standard & Poor's only defined the REIT sector as separate from financials last year. A simple rule of thumb is that if housing costs are 15-35% of your cost of living, as much as 15-35% of your portfolio should be invested in REITs as a natural hedge against rising rents and real estate prices.

A real estate investment trust (REIT) looks and trades very much like a stock, with a few additional requirements that the structure's primary business be owning and renting out real estate, and passing a large percentage of that rental income to investors in the form of dividends. In the US, the minimum percentage requirements to qualify as a REIT are 75% of assets in real estate, 75% of income from renting out that real estate, 90% of the income must be passed through to investors, there must be at least 100 investors, and no five or fewer investors can own 50% or more of the REIT. Qualifying as a REIT is important in the US to avoid being taxed at the corporate level (which can be as high as 35%), but the single level of taxation at the individual level is at ordinary income rates rather than the lower qualified dividend rates of double-taxed dividends. For this reason, I find REITs are best held in tax-free and tax-deferred IRA accounts along with taxable bonds.

REITs have performed well since the 2008-2009 crash in the US housing market, and commercial property prices have long surpassed their 2008 pre-crash peaks, and several news stories are reporting a return to loose mortgage lending standards. While the US REIT market remains by far the largest listed one globally (both in number of listings and total market cap), US REITs are starting to seem relatively overvalued on both a dividend yield and Price/Book basis compared with many overseas counterparts, and these valuations do not seem justified by US REITs' mid-range return on asset ratios.

Size and Valuation of 8 Major Exchange Listed REIT Markets Globally Source: WSJ.com, GFM calculations

The simplest way for many investors to add a REIT allocation to their portfolios is through an exchange traded fund (ETF), of which the low-cost Vanguard options are the Vanguard REIT Index Fund (VNQ) and the Vanguard Global Ex-US Real Estate ETF (VNQI), but I often prefer buying individual REITs directly in client accounts for greater flexibility.

Below are two of the largest REITs from each of above listed REIT markets, with SeekingAlpha links where available. Notice that at least two of the top holdings of VNQI, Japan's Mitsubishi Estate and Hong Kong's Sun Hung Kai Properties, are not included on this list because they are property development companies, not REITs.

Ticker Name Sector Country Currency Market Cap
OTCPK:STGPF Scentre Group Retail Australia AUD $21,940,000,768
OTCPK:WEFIF Westfield Corp. Retail Australia AUD $16,350,000,128
OTCPK:RIOCF RioCan Real Estate Investment Trust Un Retail Canada CAD $7,880,000,000
HR.UN (TO) H&R Real Estate Investment Trust Retail Canada CAD $6,140,000,256
OTCPK:LSGOF Land Securities Group PLC Diversified United Kingdom GBp £8,089,999,872
OTCPK:BRLAF British Land Co. PLC Diversified United Kingdom GBp £6,400,000,000
OTCPK:UNBLF Unibail-Rodamco SE Retail France EUR € 21,510,000,640
OTCPK:KLPEF Klepierre S.A. Retail France EUR € 11,089,999,872
0823.HK Link Real Estate Investment Trust Retail Hong Kong HKD $135,420,002,304
2778.HK Champion Real Estate Investment Trust Industrial/Office Hong Kong HKD $35,220,000,768
OTC:NBFJF Nippon Building Fund Inc. Industrial/Office Japan JPY ¥827,430,010,880
OTCPK:JREIF Japan Real Estate Investment Corp. Industrial/Office Japan JPY ¥751,539,978,240
OTC:ACDSF Ascendas Real Estate Investment Trust Industrial/Office Singapore SGD $7,840,000,000.0
OTCPK:CPAMF CapitaLand Mall Trust Retail Singapore SGD $7,200,000,000.0
AMT American Tower REIT Specialty United States USD $57,899,999,232.0
SPG Simon Property Group Inc. Retail United States USD $50,130,001,920.0

Source: WSJ.com, GFM calculations

Another advantage of owning foreign REITs directly rather than through VNQI is the greater visibility on currency hedging. One reason to own real estate, domestic or foreign, is to preserve purchasing power, but if I convert dollars into yen to buy REITs that earn a 5% total return in yen while the yen declines 10% against the dollar, I will have lost 5% in dollars. If I hedge my currency conversion back into dollars, or rather than converting simply fund my position by borrowing yen on margin, I can remove or keep the USD/JPY exposure on a position by position basis.

It is also worth noting that many of these largest REITs are retail REITs, which own and rent out shopping centers and other real estate which sell goods in physical locations, and whose tenants have been suffering from the increasing rise of online retailers including e-commerce giant Amazon Inc (AMZN). Buying foreign REITs directly is also a better way to balance sectors away from retail REITs into office, industrial and residential properties, but so far there are not many foreign REITs in specialized sectors like agricultural or timber land like are listed in the US.

Conclusion

It is important to look outside one's home country not just with stocks, but with homes and other real estate, whether physical or in REIT form.

Disclosure: I am/we are long STGPF, WEFIF, RIOCF, LSGOF, BRLAF, UNBLF, KLPEF, NBFJF, JREIF, ACDSF, CPAMF, AMT, SPG, VNQI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author's firm is a tenant of Champion REIT at its headquarters office in Hong Kong.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.