Real estate investment trusts (REITs) are a great way to diversify your investment portfolio. While REITs originated in the U.S., international REITs have sprung up worldwide, offering investors access to new and exciting markets. Therefore, international investors looking to diversify their stock portfolios may want to take a look at these securities.
Find out about international REITs and why you may want to consider them for your portfolio to diversify risk and potentially enhance returns.
- International REITs are not tied to the U.S. real estate market, providing a good way to diversify a portfolio.
- International real estate investment trusts are illiquid, making it challenging for short-term investors to sell their assets.
- The best way to invest in international REITs is through exchange-traded funds because of their liquidity and capital gains reinvesting possibilities.
What Are REITs?
Real estate investment trusts (REITs) own and most often actively manage income-producing commercial real estate. In addition to owning this real estate, some REITs also invest in loans and other debt obligations secured with real estate collateral. Most large REITs around the U.S. are publicly traded entities on stock exchanges.
Often, REITs receive special tax advantages that enable them to avoid corporate tax, as long as they distribute the overwhelming majority (90%+) of their income to investors. However, it's worth noting that despite avoiding double taxation, the 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. For instance, Morningstar found that ownership of REITs over time has historically increased investors' total return and/or lowered the overall risk in both equity and fixed income portfolios.
For U.S. investors, international REITs offer even greater diversification in many cases, given that the real estate isn't tied to the U.S. market. In addition, international REITs have low correlation coefficients with their respective country's domestic markets. Combined, these attributes make international REITs a great option for diversification.
Further diversification can be accessed by investing in global real estate funds that follow a global real estate index.
International REITs 101
REITs continue to expand worldwide after their successful debut in the U.S. These securities offer numerous advantages and disadvantages but may compliment most diversified international portfolios.
International REITs offer many advantages to investors, including:
- Inflation hedge: Real estate is widely considered an inflation hedge since it tends to build value over time, despite secular currency depreciation.
- Strong dividend yields: Many REITs offer attractive dividend yields because tax laws require that companies distribute the majority of their income.
- Conservative management: Since REITs must typically distribute their income to investors, management has less money to spend on costly pet projects.
- Diversification: REITs are a great way to diversify an existing stock portfolio. They are a different asset class from stocks and bonds and are geographically separated from the U.S.
Despite their positive qualities, there are many risks to investing in international REITs, including:
- Political risk: Land rights and taxation can be hot-button political issues in many countries worldwide where real estate is less developed than in the U.S.
- Currency risk: Exchange rates can significantly affect any foreign stocks, but especially REITs, given the large dividend distributions that are typically seen.
- Taxation risk: REITs in foreign countries can be extremely tax-inefficient, particularly if you're taxed at ordinary income rates.
- Liquidity and transparency: International REITs can be very illiquid and opaque, which can pose many risks if you have short-term time horizons.
The Best Ways to Invest in REITs
The easiest way to invest in international REITs is through the use of exchange-traded funds (ETFs). Notably, many of these ETFs do not offer dividend yields but rather the potential of capital gains from the reinvestment of any dividends. As a result, income investors may be better off selecting specific REITs to purchase that 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 and build exposure to real estate markets worldwide. Often, the best way to invest in international REITs is using ETFs since they are traded on a U.S. exchange and provide greater liquidity than individual foreign REITs.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.