Real estate investment trusts (REITs) are a good way to diversify your portfolio. REITs originated in the U.S., but international REITs have sprung up worldwide. They offer access to exciting markets. International investors looking to diversify their stock portfolios may want to take a look at these securities.
Key Takeaways
- International real estate investment trusts (REITs) aren't tied to the U.S. real estate market, so they provide a good way to diversify a portfolio.
- International REITs aren't liquid. This can make it a challenge for short-term investors to sell their assets.
- The best way to invest in international REITs may be through exchange-traded funds (ETFs) because ETFs are liquid and they offer capital gains reinvesting options.
What Are REITs?
REITs own and often actively manage income-producing commercial real estate. Some REITs also invest in loans and other debt obligations secured with real estate collateral. Most large REITs in the U.S. are publicly traded entities on stock exchanges.
REITs come with tax advantages that let them avoid corporate tax if they distribute 90% or more of their incomes to investors. But it's worth noting that although they can avoid double taxation, their structure doesn't mean that a REIT's tax losses are passed on to investors for use as carry-forwards or to offset capital gains.
Why Invest in International REITs?
There are many benefits to investing in REITs, both domestically and internationally. The Morningstar financial services firm found that ownership of REITs has increased investors' total returns over time and lowered the overall risk in both equity and fixed income portfolios.
Foreign REITs offer even greater diversification for U.S. investors in many cases. The real estate isn't tied to the U.S. market. Foreign REITs also have low correlation coefficients with their respective country's domestic markets. These factors make them a nice option for diversification.
Note
Further diversification can be achieved by investing in global real estate funds that follow a global real estate index.
International REITs 101
REITs have continued to expand worldwide after their successful debut in the U.S. They offer many pros and cons. Still, they can complement most diversified foreign portfolios.
Advantages of Foreign REITs
Real estate is widely thought to be an inflation hedge because it tends to build value over time despite secular currency depreciation. Many REITs offer attractive dividend yields because tax laws require that companies distribute most of their income. REITs must often distribute their income to investors, so management has less money to spend on costly pet projects.
REITs provide a good way to diversify an existing stock portfolio. They're not in the same asset class as stocks and bonds. They're geographically separated from the U.S.
Disadvantages of Foreign REITs
Despite their positive qualities, there are many risks to investing in international REITs. Land rights and taxation can be hot-button political issues in many countries where real estate is less developed than in the U.S. Exchange rates can affect any foreign stocks to a great extent, and REITs in particular because of the large dividend distributions that are often seen.
REITs in foreign countries can be very tax-inefficient if you're taxed at ordinary income rates. Foreign REITs can be very illiquid and opaque. This can pose many risks if you have short-term time horizons.
The Best Ways To Invest in REITs
The easiest way to invest in foreign REITs is through the use of exchange-traded funds (ETFs). Many of these ETFs don't offer dividend yields, but there's the chance for capital gains from the reinvestment of any dividends.
You may also be better off selecting other REITs to purchase if they offer attractive yields. The most popular international REIT ETFs include:
- SPDR Dow Jones Global Real Estate (RWO)
- WisdomTree International Real Estate (DRW)
- SPDR Dow Jones International Real Estate (RWX)
- iShares S&P Dev ex-US Property (WPS)
- iShares FTSE EPRA/NAREIT Dev Real Estate (IFGL)
The Bottom Line
International REITs are a great way to diversify a portfolio. They build exposure to real estate markets worldwide. The best way to invest in these REITs is often using ETFs because they're traded on a U.S. exchange. ETFs provide greater liquidity than individual foreign REITs.
FAQs
International REITs allow investors to diversify their real estate holdings beyond their domestic market. Investing in properties across different countries and regions can reduce risk and gain exposure to various real estate sectors and economic conditions.
What are the main drivers for REITs to invest internationally? ›
By investing in real estate markets in other countries, investors can reduce their exposure to domestic economic and political risks. International REITs may also provide higher yields than domestic REITs due to higher interest rates in some countries.
Can you invest in real estate in a different country? ›
Purchasing real estate overseas as a vacation home or an investment property is achievable and can help diversify a broader asset portfolio.
Are global REITs a good diversification option? ›
By investing in different types of REITs, investors can achieve significant diversification within their portfolios, whilst reducing risk and enhancing returns.
What is the 90% rule for REITs? ›
By law, REITs must distribute at least 90% of their taxable income to shareholders. This means most dividends investors receive are taxed as ordinary income at their marginal tax rates rather than lower qualified dividend rates. Any profit is subject to capital gains tax when investors sell REIT shares.
How to buy foreign real estate? ›
Tips for Buying Property Overseas
- Line up an attorney. ...
- Figure out your finances. ...
- Be aware of local real estate practices. ...
- Check residency rules. ...
- Review all tax implications. ...
- Consider security issues. ...
- Review health care options. ...
- Renting your property to vacationers.
The five largest REITs in the United States are: American Tower Corporation, Prologis, Crown Castle International, Simon Property Group and Weyerhaeuser.
Where is the best place to hold a REIT? ›
These trusts primarily pay through dividends and generally don't appreciate in value significantly. 1 Because of their high dividend yield, holding a REIT in your Roth IRA or health savings account is generally the most tax-efficient strategy.
What is the most profitable REIT? ›
Best REITs by total return
| Company (ticker) | 5-year total return | Dividend yield |
|---|
| Plymouth Industrial REIT (PLYM) | 156.1% | 3.8% |
| Equinix (EQIX) | 125.0% | 2.1% |
| Prologis (PLD) | 121.8% | 2.6% |
| Eastgroup Properties (EGP) | 107.9% | 2.8% |
4 more rowsJan 16, 2024
How to finance an overseas property
- arrange an overseas mortgage with your local bank.
- apply for a mortgage from an overseas lender.
- release equity from your home, if you already own property.
- pay in cash to buy the property outright.
Best Countries to Invest in Real Estate
| Country/City | Gross Rental Yield (% per annum) | 5Y Price Change |
|---|
| Country/City | Gross Rental Yield (% per annum) | 5Y Price Change |
|---|
| United Arab Emirates | 5.27% | 39.26% |
| United Kingdom | 7.03% | 22.61% |
| United States | 6.10% | 53.88% |
63 more rowsFor Americans, the taxes you owe on foreign real estate are largely identical to the taxes you owe on domestically held properties, but there may be different laws in the country your property is in which you must follow.
What is better than REITs? ›
Accessibility and Benefits of Real Estate Mutual Funds
Real estate mutual funds, depending on their investment strategy, can offer even broader diversification than REITs. This extensive diversification can significantly cut transaction costs for investors who prefer to put their funds in a few diversified investments.
What is the downside of REITs? ›
When investing only in REITs, individuals incur more risk than when they are part of a diversified portfolio. REITs can be sensitive to interest rates and may not be as tax-friendly as other investments.
Can you build wealth with REITs? ›
Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.
Can a US trust hold foreign real estate? ›
The use of revocable trusts for court avoidance at death is largely a U.S. concept, so you should not fund foreign property of any kind, real estate or otherwise, into a U.S. trust without careful consideration and consultation with a qualified estate planning attorney.
What type of real estate do REITs invest in? ›
U.S. public REITs own an estimated 580,000 properties and 15 million acres of timberland across the U.S. REITs invest in a wide scope of real estate property types, including offices, apartment buildings, warehouses, retail centers, medical facilities, data centers, cell towers, infrastructure and hotels.
What are the restrictions on a REIT? ›
Invest at least 75% of total assets in real estate, cash, or U.S. Treasurys. Derive at least 75% of gross income from rent, interest on mortgages that finance real estate, or real estate sales. Pay a minimum of 90% of their taxable income to their shareholders through dividends. Be a taxable corporation.
How to invest in global real estate? ›
The easiest and most cost-efficient way to add a global listed real estate allocation to a portfolio is purchasing an investment in a mutual fund or exchange-traded fund of these securities.
