Foreign REITs: Profits and Perils for Investors

The diversification benefits of real estate investment trusts are well established. But many investors limit their investments to U.S.-based properties.

That’s understandable: The domestic REIT structure provides transparency and the trading market is liquid.

This constrained approach, however, imposes an opportunity cost. Namely, it overlooks additional diversification benefits and a wide range of profit opportunities in other countries. 

REITs are a tax structure created in the U.S., says Nina Jones, CPA, manager of the T. Rowe Price Global Real Estate Fund (TRGRX) in Baltimore, Maryland. Some countries have adopted similar structures for real estate investment funds based in their country, but the processes are not universal.

Nonetheless, the foreign funds’ business models for investing in commercial real estate such as retail space, office buildings, industrial properties and hotels are very similar to U.S. REITs, she explains.

The funds’ activities consist of “buying those properties or developing those properties, trying to increase the rent and occupancy, generate … increasing cash flow from the properties and, with good management and a good market environment, you can make a good amount of money in commercial real estate,” according to the fund manager.

Overall, Jones rates foreign REITs’ transparency and market liquidity as “pretty good” and believes both conditions rank slightly below the U.S. levels but are improving. 

Potential Diversification, Added Risk

The arguments favoring foreign real estate investments are essentially the same as those for foreign stock and bond investments. The macroeconomic environments in foreign property markets often differ from those in the U.S. Their economies can be in different phases of the economic growth cycle, their demographics — particularly where the middle class is emerging — can be dramatically different, and their prevailing monetary policies may be tighter or looser. 

The regional year-to-date returns through June 12 in U.S. dollars as measured by the FTSE EPRA/NAREIT Global Real Estate Index Returns illustrate how returns can vary in the short term. The Americas’ total return for the period was -4.19%, but the Asia/Pacific index grew by 5.16%, and the Europe index increased by 5.8%.

(EPRA, the European Public Real Estate Association, represents Europe’s publicly listed property companies and is based in Brussels.)

Investors need to factor in currency swings with foreign REITs.