by Charles Sizemore | August 29, 2013 6:00 am
Every portfolio needs an allocation to real estate. It is an income-producing asset class with a strong built-in inflation hedge and favorable tax treatment. And at a time when paper profits can be fleeting, real property can offer a stable store of value.
What more can you ask for?
But investors who focus exclusively on U.S. REITs are missing out on a world of potential opportunities.
In my last article on international real estate investing, I gave the rundown on British REITs. Today, we’re going to move further east.
Outside of the U.S. and Britain, the largest and most liquid REITs are in Japan, Hong Kong, Singapore and Australia.*
If you are a believer in Abenomics — or believe that Japanese inflation is right around the corner — then the Nippon Building Fund (TYO:8951) is an attractive option. Nippon offers a respectable dividend yield at 3%, has a reasonably large market cap at nearly $8 billion, and has better liquidity that most Japanese REITs (or just “J-REITs”).
But I would tread carefully here. Given the debt and demographic issues the country faces, I can think of a lot of other assets I would prefer to own than Japanese real estate. At the risk of being overly simplistic, a shrinking Japanese population means less demand for residential, retail, and office properties in the years ahead…which should mean lower rents and higher vacancies for landlords.
Moving on to more promising countries, let’s take a look at Hong Kong and Singapore.
The Link REIT (HKG:0823, OTC:LKREF) is the first Hong Kong-listed REIT and one of the largest in the world by market cap. The Link’s property empire boasts 11 million square feet of retail space and approximately 80,000 garage parking spaces.
This is a veritable Hong Kong property juggernaut.
Following most income-oriented investments, The Link has had a rough couple months. After peaking in July, the REIT shed nearly a quarter of its value in the “taper scare” that followed. But if you’re broadly bullish about Asia’s prospects and about Hong Kong as one of its premier financial and business centers, then there is a lot to like in The Link. Shares trade at book value and yield 4% in dividends. And unlike real estate investments in much of the rest of the world, The Link actually grew its dividends throughout the crisis. The REIT has raised its payout every year since 2006.
Moving to nearby Singapore, we see much the same story. Rising bond yields caused an across-the-board selloff in income stocks such as REITs, many of which now offer very attractive yields.
Take CapitaCommercial Trust (SGX:C61U, OTC:CMIAF). Singapore’s first — and largest — publicly traded office REIT sports a dividend yield almost 6% and trades at a 20% discount to book value.
CapitaCommercial invests primarily in office buildings, which took a beating during the global financial crisis. But with Singapore’s supply of quality office space starting to get tight, rents are expected to rise significantly over the next few years. And importantly, the REIT was able to maintain and raise its dividend throughout the hard times.
Of all the REITs discussed in this article so far, I consider CapitaCommerical Trust to be the most attractive, both as a short-term trade and as a long-term income investment.
Finally, we get to Australia. I’m a little wary of investing in Aussie property at this time, as the global commodities boom that has underpinned the country’s prosperity is, in all likelihood, dead for the foreseeable future. After more than a decade of solid gains, I expect the Aussie dollar to drift lower in the years ahead, which will eat into any would-be capital gains and dividends for foreign investors.
I’m not a doom-and-gloomer, and I’m not expecting a major crash in Australia. In fact, I’m actually very impressed with the country’s fiscal management. Virtually alone in the developed world, Australia has no sovereign debt problem. Unfortunately, it’s also a country with some of the world’s most unaffordable housing, raising the possibility of a broad-based housing crash that would weaken Australia’s banking sector.
If you’re dead-set on buying Aussie real estate, I would go for a diversified option like Stockland (ASX:SGP, OTC:STKAF), Australia’s largest and most diversified REIT. The company develops and manages retail centers, residential communities and office and industrial properties.
Stockland trades at a slight premium to book value and pays a 6.5% dividend.
Check out my take on British REITs here.
*Most of the securities covered here trade in the U.S. as ADRs, and I included the ticker symbols to help you identify them. But if you decide to try your luck on any of these, I recommend you trade the shares in the local market where the liquidity is better. Most of the ADRs listed in this article are thinly traded and will not be appropriate for most investors.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. 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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