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Global REITs: Why Invest in Global Real Estate?

Investing in global REITs—real estate investment trusts—may benefit your portfolio.

The Fed’s slow and moderate approach to raising interest rates may keep yield-hungry investors looking for income alternatives, says Tony Davidow, asset allocation strategist at the Schwab Center for Financial Research. REITs, or real estate investment trusts, typically deliver higher yields than many other types of income-generating investments. Global REITs can also help increase the diversification of your portfolio. Here’s what you need to know.

 

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REITs are companies that own shares of real estate properties, mortgages or both.

REITs are a way to invest in real estate. They are companies that own shares of real estate properties, mortgages or both, and they’re generally traded on public exchanges, similar to stocks. You can buy and sell shares of REITs, and there are mutual funds and exchange-traded funds (ETFs) that own portfolios of REITs. Global REITs include investment within and outside of the U.S.

Over the past 11 years or so, global REITs nearly matched the return of U.S. stocks, and they exceeded the return of international stocks. Even more compelling, REITs paid higher dividend yields than U.S. and international stocks in 2016.

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Investing in global REITs could add to your portfolio’s growth.

Growth outside U.S. borders is accelerating. According to the International Monetary Fund, more than three quarters of global growth comes from emerging markets, and many countries have GDP growth rates exceeding the pace of U.S. expansion. Including global REITs in your portfolio could help you capture some of the growth these countries generate.

About 35% of REIT assets tracked by the FTSE EPRA/NAREIT Global Index operate outside the United States. And, as you’ll see next, the world of global REITs encompasses numerous and varied global real estate sectors.

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REITs invest in a wide range of commercial properties.

In 2016 the total market value of global REITs included in the FTSE EPRA/NAREIT Global REIT Index was just over $1.1 trillion, according to the National Association of Real Estate Investment Trusts (NAREIT).

REITs invest in a wide range of commercial properties, such as office complexes, apartment buildings, shopping malls, hotels and even alternative forms of “property,” like data storage. The chart above shows the real estate sectors included in the FTSE EPRA/NAREIT Global Index.

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REITs can add diversification; they tend to have lower correlation with traditional asset classes.

REITs can add diversification to your portfolio because they tend to have lower correlations with traditional asset classes, Tony says. Even with correlations rising in recent years, asset classes generally don’t move up and down in lockstep. So owning many different asset classes can help smooth out returns over time. As you can see in the chart above, an asset class may be the top performer one year only to be near the bottom the next.

REITs (represented by the yellow squares) are especially prone to such volatility, but they still play an important diversification role. It’s also important to note that the risks of REITs are similar to those associated with direct ownership of real estate—such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and creditworthiness of the issuer.

“REITs deliver attractive income, but they are equities, so they’re going to trade like equities—and with additional risks, such as interest rate risk.” Tony says. And global REITs also carry the additional risks of international investments.

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Global REITs have provided attractive yields relative to many equity and fixed-income asset classes.

Global REITs have been providing attractive yields relative to many equity and fixed-income asset classes. Tony says that with bond interest payouts still near historically low levels, and the dividend yield on the S&P 500® hovering around 2%, it makes sense that global REITs have become popular with investors in search of income. The average yield for a global REIT index in 2016 was more than 4%, nearly double the dividend yield of the S&P 500.

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Investing in global REITs may help you capitalize on growth overseas.

Despite mixed news about the international economy, we believe there are still global growth opportunities—and investing in global REITs can be an effective way to capitalize on some of that growth. For the past 11-plus years, global REITs (the gold line in the chart) have outperformed international developed-market stocks (the blue line) while nearly keeping pace with U.S. shares (the green line).

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 REITs can be volatile, but they may provide diversification, growth potential and may be a hedge against inflation.

If you have the appetite for higher volatility, REITs can serve as a nice complement to a traditional mix of stocks and bonds by offering both diversification and the potential for growth and income. (Speaking of income, you may want to hold REITs within a tax-deferred account. Unlike other stock dividends, the bulk of REIT dividend payouts are taxed as ordinary income, with a current potential top rate of 43.4%.)

REITs offer another potential benefit to your portfolio. “As part of your equity allocation, REITs can provide a long-term hedge against inflation,” Tony says. That’s because inflation typically leads to higher real estate values and rising rents. Bear in mind that REIT prices tend to rise along with inflation—though they can lag somewhat, which is why you’ll typically see those inflation-hedging effects over the long term.

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REITs can be volatile, but they may provide diversification, and the potential for growth and inflation protection.
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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Past performance is no guarantee of future results.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate this risk.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Indexes are unmanaged, do not incur management fees, costs or expenses, and cannot be invested in directly.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

The Bloomberg Commodity Index is composed of futures contracts on 20 physical commodities and reflects the return of underlying commodity futures price movements only. The index is a joint trademark of, and proprietary to, Dow Jones & Company, Inc., and UBS Securities, LLC.

The FTSE EPRA/NAREIT Global Index is designed to track the performance of listed real estate companies and REITs in both developed and emerging markets. By making the index constituents free-float adjusted, liquidity, size and revenue screened, the index is suitable for use as a basis for investment products, such as derivatives and Exchange Traded Funds (ETFs). The FTSE EPRA/NAREIT Global Index incorporates Real Estate Investment Trusts (REITs) and Real Estate Holding and Development companies.

The S&P 500® Index is a market-capitalization weighted index that consists of 500 widely traded stocks chosen for market size, liquidity, and industry group representation.

The Russell 2000® Index is an index that measures the performance of the 2,000 smallest companies in the Russell 3000® Index.

The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

The Alerian MLP Index is a composite of the 50 most prominent energy Master Limited Partnerships (MLPs) that provides investors with an unbiased, comprehensive benchmark for this emerging asset class.

The Bloomberg Barclays U.S. Aggregate Bond Index is made up of the Barclays Capital U.S. Government/Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Backed Securities Index, including securities that are of investment grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $100 million.

The Bloomberg Barclays U.S. Corporate High-Yield Bond Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/ BB+ or below.

The Bloomberg Barclays U.S. Corporate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate bond market.

The Bloomberg Barclays Global Aggregate Bond Index ex-US provides a broad-based measure of the global investment-grade fixed-rate debt markets. The two major components of this index are the Pan-European Aggregate and the Asian-Pacific Aggregate Indices.

The U.S. Generic Gov’t 10 Year Yield Index represents the most recently auctioned 10-year U.S. Treasury Note. The index is updated after each 10-year Treasury Note auction.

The MSCI World Index captures large- and mid-cap representation across 23 developed market countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. With 1,654 constituents, the index covers approximately 85% of the free-float-adjusted market capitalization in each country.

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