An Easy Way to Play Global Property Markets (VNQ)

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September 17, 2012 12:29pm NYSE:FIO NYSE:FRI

If you take even a casual look at the Forbes’ list of the world’s billionaires, one thing is absolutely clear. A great portion of their wealth was created not through investing in stocks, but rather through real estate. Real estate gurus will tell you to buy property in your


neighborhood, which is good advice, but the truth is that most of us don’t want to deal with all the hassles of managing property…

There’s an easier way of following the tycoons and getting more property in your portfolio. You may have read about what’s called a real estate investment trust, better known as an REIT.

Let me briefly explain the advantages of REITs and an easy way to gain property exposure in the United States and across the globe.

REITs trade like a stock and allow investors the advantage of participating in large-scale commercial real estate projects. REITs must pass 90% of their taxable income through to shareholders. In exchange, they pay no corporate income tax.

There are a wide variety of REITs on the markets, ranging from apartments to shopping centers to office complexes to hospitals and a variety of other commercial projects.

Advantages of REITs

Here’s a quick rundown on why you should take a careful look at REITs.

  • Inflation Hedge – Real estate is widely considered to be an effective inflation hedge with values rising along with higher inflation.
  • Strong Income/Dividend Yields – Many REITs offer solid dividend yields, because tax laws require that companies distribute around 90% of their income.
  • Conservative Management/Liquidity – Since REITs must typically distribute most if their income to investors, management has less chance to misuse capital. The trading liquidity of REITs has also increased significantly within the last two decades.
  • Diversification/Higher Potential Returns With Lower Risk – REITs are a great way to diversify an existing stock portfolio. And numerous studies by Wilshire show that it can increase returns and lessen volatility.

Take a Global Perspective

My advice is to take a global look at property markets, since they oftentimes diverge from stock markets and certainly don’t move together.

Here’s just one example…

With the Shanghai stock market trading close to three-year lows, the numbers from a far different Pacific Rim market last week were simply eye-catching.

Singapore’s $38-billion REIT market has returned an average 37% in 2012, according to data compiled by Bloomberg. Australia, the largest REIT market in the Asia-Pacific region with $86 billion, advanced 24%.

And for income-hungry investors, Singapore REITs, on average, offer a 6.46% dividend yield, followed by 5% for Australia and 4.93% in Hong Kong.

And according to a recent S&P report, Asia-Pacific property markets not only offer a higher dividend yield than U.S. property, they trade at a much lower valuations while offering a return on equity (ROE) four times higher.

There are currently 12 REIT exchange-traded funds on the market covering U.S. and international property markets.

Pick one or two that fits your personal situation. I will leave you with one more piece of advice:

The key to very successful real estate investing is to buy markets that are out of favor.

by Carl Delfeld, Investment U Senior Analyst

Related:

  • Vanguard REIT ETF (NYSEArca:VNQ)
  • Cohen & Steers Global Realty Majors ETF (NYSEArca:GRI)
  • Dow Jones Wilshire REIT ETF (NYSEArca:RWR)
  • First Trust S&P REIT Index Fund (NYSEArca:FRI)
  • iShares FTSE NAREIT Industrial/Office Index Fund (NYSEArca:FIO)
  • iShares FTSE NAREIT Mortgage REITs Index Fund (NYSEArca:REM)
  • iShares FTSE NAREIT Real Estate 50 Index Fund (NYSEArca:FTY)
  • iShares FTSE NAREIT Residential Index Fund (NYSEArca:REZ)
  • iShares FTSE NAREIT Retail Index Fund (NYSEArca:RTL)
  • KBW Premium Yield Equity REIT Portfolio ETF (NYSEArca:KBWY)
  • PowerShares Active U.S. Real Estate Fund (NYSEArca:PSR)
  • Schwab U.S. REIT ETF (NYSEArca:SCHH)
  • Wilshire US REIT ETF (NYSEArca:WREI)

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