Real estate investment trusts (REITs) are an excellent way to invest in real estate without having to worry about managing your own property. Because you aren’t tied to
Table of Contents - Finance Corner: Take Your Investment Abroad with International REITs
REITs have sprung up in other countries over the past few decades as countries have adopted the model established in the United States. Today, there are more international REITs than Canadian or American REITs. Investors have an opportunity to support new and developing markets worldwide and benefit from their growth. Anyone looking to diversify his or her portfolio may want to explore the opportunities available internationally.
REITs: A brief overview
REITs are companies that own, operate and/or finance income-generating real estate. REITs own property, lease property and distribute the profits from the rent as dividends to shareholders. Some REITs also invest in loans and debt obligations. Individuals invest in REITs as they might invest in a company’s stock.
REITs can focus on one property type or are diversified portfolios spanning different real estate sectors. Property types you might see in REITs include apartment complexes, hotels, office buildings, retail space, health care facilities and farmland. The trust is managed by administrators who are well-versed in how to grow and build wealth in that particular sector.
REITs often receive tax advantages if they follow guidelines regarding how much they redistribute to shareholders. Almost all of the profits must be redistributed to qualify. These rules vary depending on the country.
Currently, all seven G7 countries offer REITs: Canada, the United States, France, Germany, Italy, Japan and the United Kingdom. An additional 32 countries have adopted the U.S. model, while another 10 are considering adoption.
Benefits of investing in international REITs
According to U.S. consulting firm Wilshire Associates, allocating investments to global real estate improved portfolio returns and reduced risk. Wilshire Associates analyzed data from 1976 to 2014 for a variety of investment horizons and found that overall, portfolios including global real estate had a portfolio value that was 6.5 per cent higher.
REITs help investors to diversify their portfolios. Canadian investors don’t have to worry about how the Canadian real estate market is performing in relation to their investment. Internationally, REITs also have a low correlation with the respective country's domestic market. REITs offer diversity not only in geographic location but also in the asset class. When combined, REITs increase the benefits of diversification.
Real estate is considered a strong hedge against inflation. Real estate tends to build value over time even in the face of long-term currency depreciation. REITs help to protect your investments.
REITs offer strong dividend yields because of the way that they are structured. To receive their tax benefits, their priority is redistributing dividends to shareholders. This means more money comes back to you. Because of this, it can take longer for the REIT to grow its holdings. Trust administrators must be conservative with their spending because there is less discretionary funding.
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Risks of investing in international REITs
While international REITs offer diversity and strong yields, there are some risks associated with international investment.
Successful investing abroad – whether in REITs or otherwise – depends on the political climate. Land rights, property taxes, regulations and international investing are all subject to change depending on who is governing the country. If the country is still developing, rules may change quickly, impacting your investment.
Any international investment is influenced by the currency exchange rate. Because REITs have such large dividend distributions, the current exchange rate can play a big role in how much you earn.
Unlike stocks on the Toronto Stock Exchange, your money is less liquid when it’s in an international REIT. Depending on the country it may be difficult for you to get your money out quickly. If you have a short investment time horizon, this may not be the investment for you.
How to invest in international REITs
The simplest way to invest in international REITs is through a mutual fund or an exchange-traded fund (ETF) offering these securities. ETFs are similar to mutual funds but trade like stocks.
When adding an international REIT to your portfolio through ETF, it’s important to note that you likely won’t receive dividend yields. Instead, earnings are distributed through capital gains potential from reinvesting dividends. If an investor is interested in a specific REIT and its yields, it’s better to invest in that REIT directly.
Administrators of international REITs focus on the countries offering the strongest investment potential based on the current political and economic climate and the temperature of the local real estate market.
If you’re looking for an international REIT to get started, check out these top trusts and ETFs:
Vanguard Global Ex-U.S. Real Estate ETF (VNQI)
VNQI invests in the S&P Global Ex-U.S. Property Index. It offers broad exposure across markets in more than 30 countries, largely in Europe and the Pacific.
iShares International Developed Property ETF (WPS)
WPS invests in properties and real estate stocks in countries with established markets, such as Germany, Japan and France.
WELL invests in medical offices, senior housing, assisted living and other health care facilities across Canada, the U.S. and the U.K.
WisdomTree Global Ex-U.S. Real Estate ETF (DRW)
DRW weighs investment results by yield in emerging and developing equity markets. This makes DRW’s a unique approach in the real estate investing market.
FlexShares Global Quality Real Estate ETF (GQRE)
GQRE is an index fund that tracks the Northern Trust Global Quality Real Estate Index. Through its selection method, it works to find the best companies within the global real estate sector as if it were an actively managed fund.
International REITs are a smart way to diversify your investment portfolio. They allow you to enjoy the benefits of investing in real estate without having to actively manage a property. If you’re interested in investing in international REITs, explore which ETFs make the most sense for your portfolio.
Investment 360: Property Reits International Opportunities
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