International REITs: China Vs. World?

July 01, 2009

 

A New World Order In REITs

Another dynamic Ting points to is the fact that the development of REITs has enabled a whole new class of non-U.S. investors to get involved in the market. “Before, you actually had to buy properties. By having REIT stocks available, people who can’t invest directly in properties can now invest in the asset class. It’s a new phenomenon for international investors outside the U.S.,” said Ting.

The structure of REITs is relatively new for the rest of the world, she adds. “Many of these international real estate companies in global indexes aren’t REITs as we’d strictly define them in the U.S.,” said Ting. “But they behave like REITs since they still own buildings, in general, and earn income from rentals, for example. So for all practical purposes, they look and act like REITs.”

Cohen & Steers’ McKinley agrees. “While laws are different on an international basis, the basis of the REIT structure has been widely adopted across the world in the past six years,” he said. “There is now a common set of rules allowing for the free flow of real estate capital around the globe. It has really opened up the property markets to investors who previously had great difficulty in accessing real estate markets.”

But real estate companies aren’t out of the woods. With credit still tight, development projects around the world are crimped. And after a five-year run that lasted through 2007, REIT managers say they’re coming out of the latest recession mindful of boom-and-bust cycles in their industry.

That has translated into relatively conservative strategies in running their businesses, says Ting.

“In the past few months, real estate firms have been more successful at raising money for new acquisitions and projects. But they aren’t necessarily expanding right now. With credit markets still tight, they’ve been more concerned with controlling costs and reducing the size of debt on their books,” she said.

Surveying The Field

The most widely followed investable global real estate index is the FTSE series, according to McKinley. “It’s the closest to a comprehensive global pure real estate index,” he said. “It doesn’t include construction companies, for example. This is an index based on tracking companies that own institutional-grade commercial real estate.”

The First Trust FTSE EPRA/NAREIT Global Developed Markets Real Estate ETF (NYSEArca: FFR) follows the broad benchmark’s no-emerging markets portions. Although a bit of China (1.03%) has made it into the portfolio, FFR has a third of its assets in the U.S. Hong Kong (18%) and Japan (14.18%) are its other dominant countries.

For investors who want a one-stop global ETF, the First Trust fund has several competitors. The iShares FTSE EPRA/NAREIT Developed Real Estate ex-U.S. Index Fund (Nasdaq: IFGL) tracks another subset of the EPRA/NAREIT index. It also focuses on developed foreign markets, but largely excludes the U.S. As a result, its top countries are: Japan (22.4%); Hong Kong (19.5%) and Australia (13.3%).

Barclays Global Investors also offers a series of REIT funds that splice the FTSE index into different regions—developed Asia (IFAS), developed Europe (IFEU) and North America (IFNA).

 

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