Real estate investment trusts (REITs) are a good way to diversify your portfolio. REITs originated in the U.S., but international REITs have sprung up worldwide.
They offer access to exciting markets. International investors looking to diversify their stock portfolios may want to take a look at these securities.
- International real estate investment trusts (REITs) aren't tied to the U.S. real estate market, so they provide a good way to diversify a portfolio.
- International REITs aren't liquid. This can make it a challenge for short-term investors to sell their assets.
- The best way to invest in international REITs may be through exchange-traded funds (ETFs) because ETFs are liquid and they offer capital gains reinvesting options.
What Are REITs?
REITs own and often actively manage income-producing commercial real estate. Some REITs also invest in loans and other debt obligations secured with real estate collateral. Most large REITs in the U.S. are publicly traded entities on stock exchanges.
REITs come with tax advantages that let them avoid corporate tax if they distribute 90% or more of their incomes to investors. But it's worth noting that although they can avoid double taxation, their structure doesn't mean that a REIT's tax losses are passed on to investors for use as carry-forwards or to offset capital gains.
Why Invest in International REITs?
There are many benefits to investing in REITs, both domestically and internationally. The Morningstar financial services firm found that ownership of REITs has increased investors' total returns over time, and/or lowered the overall risk in both equity and fixed income portfolios.
Foreign REITs offer even greater diversification for U.S. investors in many cases. The real estate isn't tied to the U.S. market. Foreign REITs also have low correlation coefficients with their respective country's domestic markets. These factors make them a nice option for diversification.
Further diversification can be achieved by investing in global real estate funds that follow a global real estate index.
International REITs 101
REITs have continued to expand worldwide after their successful debut in the U.S. They offer many pros and cons, but they can complement most diversified foreign portfolios.
Advantages of Foreign REITs
Real estate is widely thought to be an inflation hedge because it tends to build value over time despite secular currency depreciation. Many REITs offer attractive dividend yields because tax laws require that companies must distribute the majority of their income. REITs must often distribute their income to investors, so management has less money to spend on costly pet projects.
REITs provide a good way to diversify an existing stock portfolio. They're not in the same asset class as stocks and bonds. They're geographically separated from the U.S.
Disadvantages of Foreign REITs
Despite their positive qualities, there are many risks to investing in international REITs. Land rights and taxation can be hot-button political issues in many countries where real estate is less developed than in the U.S. Exchange rates can affect any foreign stocks to a great extent, and REITs in particular because of the large dividend distributions that are often seen.
REITs in foreign countries can be very tax inefficient if you're taxed at ordinary income rates. Foreign REITs can be very illiquid and opaque. This can pose many risks if you have short-term time horizons.
The Best Ways to Invest in REITs
The easiest way to invest in foreign REITs is through the use of exchange-traded funds (ETFs). Many of these ETFs don't offer dividend yields, but there's the chance for capital gains from the reinvestment of any dividends.
You may also be better off selecting other REITs to purchase if they 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. They build exposure to real estate markets worldwide. The best way to invest in these REITs is often using ETFs because they're traded on a U.S. exchange. ETFs provide greater liquidity than individual foreign REITs.