Are Global REITs The Way To Go?

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The beauty of investing in real estate investment trusts (REITs) lies in the diversification benefit it offers, compared to direct equity real estate investments. Investing in REITs rather than buying actual commercial assets allow for more effective and efficient way to diversify one’s real estate portfolios as they tend to be more liquid.

While REITs originated in the U.S. and Australia, international REITs have sprung up around the world offering investors access to new and exciting markets. However, many investors have stayed away from real estate in their investment portfolio the last two years due to the fallout from the pandemic.

Like many other industries, the past two year have negatively affected global REITs. The good news is that this sector may now be undervalued and Malaysians looking to expand their investments beyond our local shores can adding REIT into their portfolio.

Here are the key factors you should look at when considering global REITs.

Signs of potential returns

Now could be a good time to expose your investments to international REITs, but first, evaluate the securities based on these factors:

1. State of the economy

Due to different economic climate in different countries, different REITs perform differently. However, a booming or potentially booming economy will usually mean better performing REITs.

As the economy expands, so will companies and businesses. They would need to take on more space, which would benefit office and selected industrial REITs.

Consumers would also have higher disposable income, increasing their tendency to shop and travel more, benefitting retail, hotel and resort REITs. With higher income, more individuals would also consider buying properties, either for their own occupancy, or for investment purposes. This will boost residential REITs within the country.

2. Aging population

Though an aging population is usually not a good sign for a country, investors can still benefit from investing in healthcare REITs in such countries. For example, in the U.S., the increased aging population and the hike in retirees of the baby boomers generation, results in higher demand for assisted living and nursing home facilities. These healthcare facilities will likely outpace the current supply of available properties.

The baby boomer generation will also consider downsizing from larger family homes to smaller apartments, if not assisted living facilities or nursing homes. This will boost the residential REITs as well.

3. Mortgage rates

One of the major concerns for most property buyers, be it a genuine buyer or investor, is the uncertainty of home interest rate. Some of this housing related activities may be curtailed by an increasing cost of credit when interest or mortgage rates rise.

On the flip side, a hike in mortgage rates may bring good news to residential REITs investor as more people will put off buying a property and continue renting. This will potentially help boost apartment rentals.

4. Tax efficiency for foreign investors

REITs, while subject to complex tax rules, can be tax-efficient vehicles for foreign investment in real estate. This depends on which country you decide to invest in.

In the US, real property interest by a foreign person is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. A REIT that distributes all of its taxable income is not subject to the US corporate-level tax. In addition, foreign shareholders of a REIT benefit from certain exceptions of the FIRPTA tax:
– a foreign investor who owns 5 percent or less of a publicly traded U.S. real property company, including a REIT, is exempt from the FIRPTA tax on the sale of that stock;
– a foreign investor owning 5 percent or less of a publicly traded REIT is exempt from FIRPTA tax on the receipt of a capital gain distribution attributable to the sale or exchange of a U.S. real property interest.

Advantages to international REITs investment

Inflation hedge – One of the most common ways to battle inflation is through real estate investment as it tends to build value over time, despite secular currency depreciation.
Strong dividend yields – To be qualified for corporate tax exemption, REITs usually offer attractive dividend yields as it is required that companies distribute the majority of their income.
Conservative management – Since REITs must typically distribute their income to investors, management has less money to spend on costly pet projects.
Diversification – REITs are a great way to diversify an existing stock portfolio across various asset classes and geographical differences.

Risks to international REITs investment

Political risk – For less developed countries, political turmoil may raise issues with regards to land rights and taxation.
Currency risk – Exchange rates affect most types of investment, but especially REITs, due to the large dividend distributions.
Taxation risk – Gains from REITs in certain countries can be extremely tax inefficient, particularly if the investor is taxed at ordinary income rates.
Liquidity and transparency – International REITs can be very illiquid and opaque, which can pose many risks to investors, especially those with short-term time horizons.

REITs present a great opportunity for both small and large investors to get exposure to the various areas of commercial real estate with liquidity and transparency in a diversified portfolio with relatively low leverage.

However, most investors are sceptical to put their money in an unfamiliar territory. Do your homework before delving into a completely foreign investment, and you may just reap the desired results.