Foreign REITs: Right for clients?
Many -- even most -- clients hold foreign as well as domestic equities; some hold foreign bonds as well. Does the same principle hold for real estate? Do foreign properties belong in a diversified portfolio?
Definitely, according to Cathy Pareto of Cathy Pareto and Associates, an investment management and financial planning firm in Coral Gables, Fla. “REITs offer investors an avenue to add a real estate component to their portfolio for improved diversification,” she says. “Research has shown that securitized real estate behaves differently enough from equities to be considered a separate asset class.”
“U.S.-based REITs have added diversification to a balanced asset allocation for many years, due to their low correlation to other asset classes. International REIT markets offer similar diversification benefits,” she says.
GLOBAL OPPORTUNITY & DIVERSIFICATION
Scott Crowe, managing director at Resource Real Estate, a Philadelphia-based investment firm, notes global opportunity and diversification as reasons to hold foreign properties. “With a two-year lag behind the U.S. real estate cycle, the European real estate cycle is currently experiencing a bottoming out,” he says. “As asset prices decrease, strategic acquisitions of cheap but quality buildings will help European real estate companies experience accretive growth.”
Properties in Western Europe, the U.K., and Scandinavia, for example, may be acquired at a discount, says Crowe, who is the global portfolio manager for Resource Real Estate Diversified Income Fund. “Other international investment opportunities come from high-growth Asian markets such as Hong Kong and Singapore,” he says. “Japan is also experiencing real estate recovery after a seven-year downturn.”
As a further benefit, Crowe notes that holding international REIT exposure also allows for diversification away from the current U.S. interest rate cycle. “As the real estate equities market wanes over potential interest rate increases,” he says, “investments outside the U.S. can help investors hedge the interest rate risk.”
OPTIONS FOR INVESTING
Just as with stocks and bonds, clients have many ways to invest in REITs from outside the U.S. Some large domestic REITs have as much as one-third of their assets in properties located in foreign nations such as Germany, France, and even Finland. There are foreign REIT ETFs and mutual funds.
As for Pareto, she tends to use a global index REIT fund that has U.S. and international holdings. “This fund holds between 55% and 60% of its assets in properties from the U.S. and Canada,” she says, “with the balance in Asia/Pacific, Japan, Europe, the U.K., Africa, Latin America, etc.” Pareto puts the current yield from this broad, worldwide REIT fund at around 3%, representing a blend of domestic and foreign properties.