Property has long been regarded as a useful portfolio diversifier – and an attractive way to access such assets is via Real Estate Investment Trusts (REITs). These stock market listed vehicles, which are subject to stringent regulations, give investors exposure to income-producing property assets around the world.
But what do you need to know about global REITs, which funds are worth considering, and are the experts predicting good or bad times ahead?
Let’s kick off with a quick overview of the sector. REITS are listed companies that are floated on stock markets in the same way as shares in any other listed company. They will own – or finance – income producing real estate across a variety of sectors, such as offices, residential buildings, warehouses, and hotels.
They have a track record of reliable and growing dividends, as well as stock market price increases, according to Nareit, a global voice for the industry. “Listed REITs are professionally managed, publicly traded companies that manage their businesses with the goal of maximising shareholder value,” it has stated.
REITs are now available across the world. In the UK, for example, they were first introduced in 2007 to give people access to property without the costs – and hassle – of owning actual buildings.
The main positive is the sector’s role as a diversifier. The economic minefields of the last few years have illustrated the importance of having a broad spread of assets. Property is particularly attractive in this respect because it’s generally uncorrelated with other assets, such as equities and bonds. Another attraction is the income they pay and the fact that they are able to increase dividends most years.
Of course, no asset class provides a guaranteed route to riches and REITs are no different. They can still be adversely affected by global economic problems. For example, during recessionary periods, there’s more chance of businesses running into financial difficulties – or going bust completely – which has an obvious impact on property demand.
As we’ve already mentioned, property has long been popular with investors searching for attractive income, total return, and diversification benefits, according to fund manager Cohen & Steers. In a sector report, the fund group noted real estate had experienced “a significant shift of capital” from private market investors to the public market in recent decades. “As a result, the US equity REIT market has grown from just $9bn in 1991 to $1.3tn today, while global listed real estate is now valued at $1.9tn,” it noted.
More broadly, institutions believe attractive buying opportunities will emerge over the next few years, according to a report published by Hodes Weill & Associates and Cornell University. “This comes despite the fact that economic turmoil, geopolitical risk, and rising inflation and interest rates have contributed to the first decline in institutional investor confidence in real estate in five years,” it stated.
The Covid-19 crisis highlighted the resilience of the global REIT sector, according to Dominique Moerenhout, chief executive of the European Public Real Estate Association (EPRA). In the organisation’s 2022 survey, he noted the sector’s recovery in Europe was five times faster than following the global financial crisis.
But he also acknowledged the “uncertainty and volatility”, caused by the war in Ukraine, that was having an impact on the global economy and all businesses. “Rising energy and commodity prices, increased construction costs, spiking inflation and interest rates hikes provide for new ‘what if’ scenarios that investors and property companies must adapt to,” he wrote. However, he insisted that the industry had the right fundamentals to navigate through these challenges, including a transparent, robust, and reliable investment framework.
Eurozone REITS look more attractive than those in the US or the UK, according to Mark Unsworth, associate director of Oxford Economics. “We think that Eurozone REIT prices are relatively attractive following their underperformance over the year-to-date,” he said. He cited a wide yield spread and larger discounts-to-NAV, combined with expectations that inflation would return to target quicker than other regions, as reasons for his optimism.
“This should allow interest rates to subside next year, supporting a recovery in eurozone REITs,” he added. “In contrast, we think a further leg downwards is likely in the near-term for the US and the UK due to inadequate yield spreads, credit tightening, and slowing economies.”
A popular way of getting access to this asset class is through an investment fund, run by a professional manager, that embraces a variety of REITS. Some of these portfolios will focus on specific geographic areas, while others will take a more international approach.
For example, the Cohen & Steers Global Real Estate Securities fund, which is managed by Jon Cheigh, invests in REITS and other publicly traded real estate companies around the world. We see it as a useful option for investors wanting a safe pair of hands in an asset class that can add decent diversification to a broader portfolio. According to the most recent factsheet, the fund has just over 60% exposure to the US, followed by 10.1% to Japan*. Other country exposures include Hong Kong, the UK, Australia, and Singapore*.
In a recent commentary, its management team highlighted opportunities in Asia Pacific from reopenings and China’s supportive monetary policy stance. “Within Australia, we favour property sectors that are relatively insulated from the encroachment of e-commerce activity,” it stated.
Another option for investors is the CT European Real Estate Securities fund. As its name suggests, this provides access to a portfolio of real estate securities in the UK and Europe. One of its 10 largest holdings is in Tritax Big Box REIT, which has a portfolio of modern, high-quality development and asset management assets**. These sites are currently let to customers in a wide variety of business sectors, including IT, manufacturing, automotive, retail, and e-commerce.
And, of course, the VT Chelsea Managed Funds range has also been an active investor in REITs, particularly within the VT Chelsea Managed Monthly Income fund, as they have been an excellent alternative source of income in the past few years. In the last fund update***, the investment advisers said: “The fund’s exposure [to REITs] is currently relatively low at 7%. Many previously unremarkable trusts have fallen 30 or 40% in the past nine months. Whilst in some cases there is good reason for this we are now finding some really exciting opportunities.
“One new position is a trust which owns GP surgeries with long leases and very secure rental income. The trust was previously loved by the market and was expensive and the fund did not own it. Now the share price has collapsed, and it is down 40% on higher interest rates, despite the fact the company continues to grow its rent and has locked in most of its debt at exceptionally low rates for over ten years. You can now buy this trust on a 6.5% dividend yield, and we expect that dividend to grow in the future. This is exactly the sort of dependable income asset we are looking for.”
*Source: fund factsheet, 30 April 2023
**Source: fund factsheet, 31 May 2023
***Source: fund factsheet, March 2023
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and commentators and do not constitute financial advice.