by Charles Sizemore | August 28, 2013 6:00 am
REITs have become a portfolio staple for income investors over the past decade and rightfully so. There are few investable options that offer the same potential for a high and rising cash payout, a built-in inflation hedge and diversified exposure to an asset class — commercial real estate — that would otherwise be off limits to most individual investors.
I’m a big believer in REITs, and I own a couple — such as Realty Income (O) and National Retail Properties (NNN) — that I hope to never sell. I plan on using their income streams to pay my bills in retirement … and if my kids are smart, they will hold on to the shares long after I’m gone. There is no such thing as a “risk-free” investment, but a high-quality, cash-flowing property portfolio is the closest thing I’ve found.
While the REIT structure was invented in the U.S. and the vast majority of all traded REITs are American, the idea has caught on overseas, particularly in the U.K. and parts of Asia. And just like their red, white and blue counterparts, you should absolutely consider international REITs for your diversified income portfolio.
Today, we’ll look at a few international REIT options in Britain, then follow up later by looking at Asian REITs.
Before you run out and buy British REITs, there are a couple points to consider.
Structure: The REIT structure is still relatively new to the U.K., having been introduced in 2007. Most British REITs were originally property development companies rather than semi-passive landlords. As such, they tend to be more growth-focused than purely income-focused.
Foreign Trading: Many British REITs trade in the U.S. as ADRs, but I do not recommend buying them. Even though each of the REITs mentioned is a multibillion-dollar enterprise, the trading volumes on the ADRs is almost nil. You’re much better off buying the London-listed shares I’ve listed below. These days, it’s not particularly hard to trade on foreign markets, though depending on your broker, you might need to call the order in rather than using the website. If you are new to international markets, I recommend you call your broker and have them walk you through the process.
I’ll start with the largest, Land Securities (LON:LAND, OTC:LSGOF). Land Securities — which holds a mix of office, retail and residential properties — is heavily weighted in London, which has been a major boost for the portfolio. Even while the rest of the country has seen property values languish during the past five years, prices in London’s posh neighborhoods — which are at new all-time highs — make it look like 2006 all over again. London property has been a favored haven for the world’s wealthy, and particularly the wealthy from Russia and the Arab world.
Land Securities is reasonably cheap, trading at about a 5% discount to book value. But this is only cheap if you consider the underlying property itself to be reasonably priced. The stock yields 3.35% in dividends, which is a little on the skimpy side for a REIT. And the company cut the dividend during the pits of the 2008-09 financial crisis, which is a cardinal sin for an income investment.
So, Land Securities is essentially a bet on London property prices and on the success of new developments, making it far more of a growth investment than a pure income investment.
Next on the list is British Land (UK:BLND, OTC:BTLCY), which is also heavily weighted in London. British Land’s portfolio is more heavily weighted in retail properties, though, which account for about half of its holdings.
At 4.7%, British Land sports a more attractive dividend yield, though the company’s payout has actually shrunk a little from its pre-crisis levels. It also trades at a slight discount to book value (a little less than 3%).
For a more diversified choice, take a look at Hammerson PLC (LON:HMSO, OTC:HMSNF). Hammerson is a diversified retail REIT with properties scattered across the U.K. It also owns a fair number of properties in Germany, Spain and France.
Having less exposure to London, Hammerson has benefited less from the boom in that market. But as Europe’s capital markets return to “normal,” Hammerson might have the best upside from this point on.
Hammerson trades at an 11% discount to book value and yields a modest 3.7% in dividends. Like the other REITs covered, Hammerson hit a rough patch during the financial crisis and was forced to issue new stock and reduce its dividend per share, though the dividend has been steadily rising since 2010.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As As of this writing, he was long O and NNN. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.
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