In their zeal for yield, investors have been loading up on U.S. real estate investment trusts to the point where this asset class has perhaps become too popular: A basket of publicly traded REITs as measured by the SPDR Dow Jones REIT ETF (RWR), which tracks the 83 components of the Dow Jones U.S. Select REIT Index, has risen about 250% since bottoming out in early 2009. That rise has pushed a once-respectable yield down to just 2.9%.
Investors looking for higher yields and better values in this asset class should look overseas. “They tend to be a little cheaper in terms of price-to-sales and price-to-earnings than their U.S. peers,” says Jeremy Schwartz, WisdomTree’s research director.
Equally important, real-estate focused ETFs outside the U.S. sport higher relative payouts then their U.S.-focused counterparts––whereas the SPDR Dow Jones REIT ETF yields less than 3%, several globally-focused ETFs sport yields exceeding 5%.
Why the disparity? “They’ve proven to be quite volatile so investors have demanded the higher yields to compensate for that risk,” says Todd Rosenbluth, ETF research director at S&P Capital IQ.
But Schwartz doesn’t buy into that argument about risk. “The non-U.S. REITS carry roughly one-third less debt leverage, which to my mind lowers risk,” he says. He concedes that currency effects in places such as Australia and Hong Kong can impede dollar-adjusted performance.
It’s important to keep in mind that that income-focused asset classes such as real estate could be negatively impacted by rising global interest rates, both in terms of higher financing costs for the developers and in the relatively greater appeal that other asset classes may hold in a rising rate environment. Still, rates are expected to remain quite low for at least a few more years.
Once Size Doesn’t Fit All
Of course, when talking about global real estate, you need to make some clear regional distinctions. European real estate remains in a deep slump, though a lack of new construction activity means that supply has been constrained, setting the stage for rising rents and selling prices as the Eurozone recovers.
Schwartz suggests investors focus on emerging markets, where vigorous economic activity has led to a surge in construction activity and asset prices. “Europe still has a lot of risk and I think the Asian growth stories are much more attractive,” he says.
Here’s a quick survey of globe-spanning real estate ETFs: