We are currently in the midst of one of the most prolonged economic slowdowns in decades. While signs of life have been returning to the equity and credit markets, the short-term outlook still remains one of uncertainty, compounded in the sector of real estate. This is a shame. Property as an investment offers diversification benefits coinciding with high dividend yields. This is added to its benefit of low correlation to equities and bonds. However, as the main destroyer and cause of the current crisis, the asset class has fared pretty poorly in recent months. The broad U.S. real estate portfolio measured by the iShares Dow Jones U.S. Real Estate (NYSE:IYR) is still well off its $90-plus highs. With experts and various analysts still spelling doom and gloom for the sector, especially in commercial real estate, investors in the sector are making speculative bets at best. However, for investors willing to pack their passports, the story is very different one.
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While the market for real estate in the United States is still experiencing some rocky footing, globally the asset class is once again booming. Since the mid-nineties, nearly 30 varied countries, from Singapore to France, have adopted the Real Estate Investment Trust (REIT) tax structure. Prior to 1990 only four nations had REITs. The global real estate sector's market capitalization has expanded several fold, from $165-742 billion from January, 1990 to today. Despite this explosive growth, the global securitized real estate market is relatively small, compared to the broad international equity and fixed income markets. This gives the sector more for growth over the long term. In addition, by focusing our real estate dollars outside of the United States borders, we gain access inefficiencies in pricing. Globalization, while giving areas access to capital investment, has not changed supply and demand dynamics or other local operating characteristics intrinsic to local real estate markets.
Adding International Real Estate via ETFs
With the recent exchange traded fund boom, adding international real estate to a portfolio has never been easier. Several different funds exist, following different global property indexes.
The iShares S&P Developed ex-U.S. Property Fund (AMEX:WPS) measures the investable market for real estate companies domiciled in the developed world, outside of the United States. Currently, the fund holds 228 different real estate stocks, across 20 different country allocations. With Japan and Hong Kong, the two largest international REIT markets at nearly 50% weighting. The fund yields 3.14% and charges 0.48% in expenses.
Also launched from the successful line of iShares ETFs comes the FTSE EPRA/NAREIT Dev RE ex-U.S. (Nasdaq:IFGL). This fund focuses its attention on Canadian, European and Asian real estate markets. This includes a small 6% weighting to China, as well as other emerging nations. The index fund is up over 36% year to date.
The first ETF to enter the space is also one of the best. The SPDR Dow Jones International Real Estate (NYSE:RWX) was first launched 2006 and holds 132 different REITs and property managers from around the world, excluding the United States. The fund is also the most heavily traded at a three-month average of 182,000 shares each day. The iShares funds only average 30,000 a day. The SPDR charges 0.59% in expenses and yields 4.14%. For investors wanting one trade for their real estate dollars, State Street (NYSE:STT) offers the SPDR Dow Jones Global Real Estate (NYSE:RWO), which adds U.S. REITs to the mix.
The Bottom Line
While the health of the United States real estate market is still in question, the global market for property is beginning to return to its former glory. As a low correlated asset that is often missing from investors' portfolios, gaining exposure to the segment is easy through exchange traded funds. The aforementioned ETFs offer an easy way to access this market. (For related reading, check out ETFs Vs Index Funds: Quantifying The Differences.)
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