International REITs: China Vs. World?

July 01, 2009

Foreign real estate ETFs are having a banner year. But in a crowded field, funds leaning the most heavily toward Asia are ahead of the pack.


Just like most other sectors, U.S. real estate investment trusts are taking advantage of a broad rally in stocks. In the past three months, for example, the broad-based Vanguard REIT ETF (NYSEArca: VNQ) has soared more than 28% as investors look for a bottom in the credit meltdown.

Still, VNQ is down more than 13% in 2009. In the past 12 months, it has fallen by more than 40%.

A stark contrast is the rapidly evolving international REIT exchange-traded funds segment. At the end of 2006, the first global fund of its kind launched. The SPDR Dow Jones International Real Estate ETF (NYSEArca: RWX) now has at least 10 global-themed rivals. Some are widely diversified, while others are very regional or country specific in nature. (See table on last page.)

As a group, they’ve held up through the mortgage meltdown and worldwide recession much better than domestic REITs. RWX has actually gained a bit more than VNQ in the rally that began in March. And it’s up by double digits so far this year.

Towering over the field, though, is the Claymore/AlphaShares China Real Estate ETF (NYSE: TAO). Since the rally’s start it has gained more than 60%. This year, it’s up more than 63%. In large part, how much exposure more diversified regional and global REIT ETFs have to China and closely related markets in Asia is driving short-term results.

Diverging World Markets

Most key world markets have succumbed to the same basic set of problems in the past two years, some more so than others. But the recent rally has had a decoupling effect, notes Chip McKinley, a portfolio manager for Cohen & Steers Capital Management’s global real estate strategies, which runs about $5 billion in U.S. assets.

“Correlations were tight when all markets were falling. But we’re starting to see a real divergence in the past several months as economies have rebounded,” he said.

Asia is far and away the leading performer this year. So far in 2009, the widely followed FTSE EPRA/NAREIT Global Real Estate Index of developed and emerging markets has jumped more than 35% since mid-March. Much of that has come from an even bigger jump by the Hong Kong portions of the benchmark. Singapore’s real estate market has been the next-best performer of late.

“There has been a huge dislocation between Asia and the U.S. as well as Europe this year in commercial real estate investments,” said McKinley. “The huge stimulus efforts in China alone have resulted in far better than expected activity in real estate developers. And it’s spreading across Asia.”

Asian countries have embraced using public funding to support local development, he added. “It stands as a very stark contrast to what’s happening in the U.S. and developed Europe. In China, they’re in a really robust and V-shaped recovery,” McKinley said.

That’s bringing more capital investment from overseas, he added. “We’re seeing a tremendous amount of capital formation taking place right now in China and much of the rest of Asia,” said McKinley. “But this improvement in commercial real estate activity is starting in China and likely will be the primary beneficiary, although we’re seeing some momentum spreading to other countries as well in the region.”

That’s evident by the run of TAO. It’s also apparent by the under-performance of Europe and Japan. Of global REIT ETFs investing at least partially outside the U.S., the iShares FTSE EPRA/NAREIT Developed Europe Index Fund (Nasdaq: IFEU) has been the biggest laggard. It has risen slightly more than 22% since the rally began and barely has remained in the black for the whole year.

A big part of that drag in 2009 has come from the U.K. and its oversized exposure to financial sectors, says Dina Ting, a senior iShares portfolio manager who oversees BGI’s international real estate funds.

“Office and retail REITs in the U.K. have been significantly weakened by the credit crunch,” she said. “And even in the parts of Asia most affected by the downturn, property values aren’t as expensive relative to the U.K. and other heavily hit parts of Europe.”

As a result, Asian markets had less room to fall in terms of finding a floor to real estate prices. By the same token, they could provide the most room for growth as China aggressively pumps public funds into commercial development, says Ting.


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