The big REIT play investors are letting get away
Yield-hungry investors may be overlooking a solid income source: global real estate investment trusts.
Though the U.S. is still the largest REIT market—by far—it's other parts of the world that feature even higher-yielding REITs right now. The biggest global REIT ETF—SPDR Dow Jones Wilshire International—is yielding a hefty 4.6 percent. The domestic SPDR Dow Jones REIT ETF had a yield of just 3.3 percent as of Jan. 24.
The fund asset flows so far this year show investors starting to favor global REITs at the expense of U.S. counterparts. Year-to-date through Jan. 22, $97 million had flowed into global REIT funds, according to Lipper, while U.S. REIT funds had experienced $354 million in outflows.
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"Global REIT ETFs are an inexpensive, tax-efficient way to get broad-based global exposure," said Advisor Partners' chief investment officer Dan Kern, who prefers diversified funds rather than buying individual REITs. Diversification also helps lessen volatility, since some foreign REITs are small and thinly traded, he added.
There are currently 12 global REIT ETFs, according to ETF Database, including one just focused on China. They're cheaper to own than actively managed REIT mutual funds, and higher expenses eat into returns, said Todd Rosenbluth, ETF research director at S&P Capital IQ, which still favors U.S. REITS over global counterparts. The average global real estate ETF expense ratio, which is 0.51 percent, is "acceptable," Rosenbluth said.
Kern's Walnut Creek, Calif.-based financial advisory firm has been upping its global REIT allocation with some non-U.S. REITs are paying yields between 5 percent and 6 percent. "That's superior to other income-producing stocks," Kern said. He is currently scouting out REIT ETFs and mutual funds that invest in Europe. "It's an interesting recovery play," he said.
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The same central banking stimulus that buoyed the U.S. housing market has also helped to pick up European and Asian markets, including Japan. There's also more demand in Europe and Japan, while supply remains muted.
Jason Yablon, global portfolio manager at real estate fund manager Cohen & Steers, said global REITs are undervalued—in fact, he thinks they're cheaper than the sum total of the physical assets they own.
Europe is a favorite REIT play for Yablon, too, and the U.K. in particular, which has the most REITs in Europe. One U.K.-based REIT he likes is Hammerson, which owns malls in Europe. He also likes SEGRO, which owns commercial properties. "There's a good pool of REITs to choose from in the U.K.," he said, "though they're mainly commercial."
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In Asia's largest REIT market, Japanese REITs chalked up strong gains in 2013. Yablon is steering clear of Japanese REITs this year because of its performance run and other reasons: "Japanese REITs are also plain vanilla and aren't as dynamic at acquisitions as other foreign REITs," he said.
Instead, Yablon is turning his Asia-based attention to REITs in Australia, where he expects the economy to improve this year. Mirvac Group and Goodman Group are two commercial REITs he likes. "Australia was a huge beneficiary of China's growth," he said.
Australian REITs are yielding more than 5 percent.
Several other countries have also launched REITs in the past few years, including Canada, Mexico and Singapore. They usually follow the U.S. REIT model—meaning they all have high payouts and similar structures. Yablon is focused on Mexican REITs, since they benefit from U.S. economic growth: Mexico is the second-largest trading partner of the U.S. after Canada.
The big concern with global REITs is currency risk: As the dollar strengthens in 2014, U.S. investors who invest in non-U.S. stocks will get hurt, Rosenbluth said. The flip side is that global REITs also help investors avoid U.S. interest-rate risks, which hammered U.S. REITs as rates began to creep up due to Fed-tapering fears in 2013.
—By Constance Gustke, Special to CNBC.com