US REITs already have international exposure

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InvestorNewb
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US REITs already have international exposure

Post by InvestorNewb »

I had some time today to look up the 10 largest holdings of Vanguard REIT ETF (VNQ).

5 out of the 10 companies already have international exposure.

1) Simon Property Group Inc.
Our industry-leading retail properties and investments across North America, Europe and Asia provide shopping experiences for millions of consumers every day and generate billions in annual retail sales.
2) Public Storage
Today it operates over 2,200 unique and diverse company-owned locations in the United States and Europe, totaling more than 142 million net rentable square feet of real estate.
3) Equity Residential [US-only]

4) Prologis Inc.
Prologis is the leading owner, operator and developer of industrial real estate, focused on global and regional markets across the Americas, Europe and Asia.
5) AvalonBay Communities Inc. [US-only]

6) HCP Inc. [US-only]

7) Ventas Inc.
Ventas, Inc. (NYSE: VTR), an S&P 500 company, is a leading real estate investment trust (REIT), with a highly diversified portfolio of nearly 1,500 seniors housing and healthcare properties in the United States, Canada and the United Kingdom.
8) Health Care REIT Inc.
The company has formed enduring relationships with leading health care systems and seniors housing operators in the U.S and abroad.
9) Boston Properties Inc. [US only]

10) Vornado Realty Trust [US only]

Based on the above, can we not make the same argument that we sometimes hear about the total international stock index? i.e. that holding a separate index (namely VNQI) is unnecessary because the companies already have exposure outside the US.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
KyleAAA
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Re: US REITs already have international exposure

Post by KyleAAA »

You can make that argument, but I don't think it's a very convincing argument because while they may do business in foreign countries, that doesn't mean it shares the same geopolitical risk/reward profile as a REIT BASED in a foreign country. China is a prime example of a nation where a foreign company doing business there and a native company doing business there are treated COMPLETELY different by the government.
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baw703916
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Re: US REITs already have international exposure

Post by baw703916 »

And we don't need to buy international equities in general, because the S&P 500 makes a lot of their profits from international operations.

(I disagree with the statement above)
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Re: US REITs already have international exposure

Post by abuss368 »

I never go for that argument. Why do I want Ford and not Hyundai or Honda? Why Exxon and not BP? Wells Fargo and USB?

One of the largest non-US REITs is Westfield from Australia. I was in Florida not to long ago and there were plenty of malls and real estate owned by Westfield.

The US REIT Index Fund has approximately 135 entities. The International REIT fund has approximately 555 entities. That is a combined 690 entities. I would rather have that diversification!
John C. Bogle: “Simplicity is the master key to financial success."
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Boglenaut
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Re: US REITs already have international exposure

Post by Boglenaut »

US REITs already have international exposure
It works the other way around as well. When I researched the international REIT fund, one of the biggest holdings was Westfield, which is an Australian REIT that owned the mall down the street from me.

Seemed silly to pay a premium to invest in a mall a few miles away.
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SimpleGift
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Re: US REITs already have international exposure

Post by SimpleGift »

Interesting research, InvestorNewb, thanks. Ever since Vanguard came out with their US REIT Index Fund in 1996, I've had a 10% portfolio allocation to it and appreciated its good returns and modest diversification benefits. However, since they launched their Global Ex-US REIT Index Fund in 2010, I haven't been persuaded to diversify further into global real estate.

One reason is portfolio simplicity (haven't wanted to add another fund) — and the other is that I'm not convinced, in this era of increasing global financial integration, that international real estate securities are going to move all that differently than US real estate securities (chart below). Your research further reinforces this sense, as US REITs themselves begin to branch out and invest in international properties. Perhaps global correlations will diverge in the future, but the trends suggest otherwise.

Image
Source: Slideshare
Dario33
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Re: US REITs already have international exposure

Post by Dario33 »

Interesting topic and one I go back and forth on as well. Valid arguments on both sides of the aisle. I currently have 20% of my stocks in International - I did the same with REITs. Yes, it's another fund, but in my mind the simplicity remains manageable since I'm mirroring the same model I practice for stock allocations.
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Re: US REITs already have international exposure

Post by shawcroft »

I, too, have been tempted to add international REITS to our portfolio. Uncertain if it would add a diversification benefit, I have been waiting for studies to confirm- or refute- this possibility. Simplegift's post is the first one showing the correlations of the various global real estate securities over about 6 years. A short time period but very interesting findings,
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Re: US REITs already have international exposure

Post by SimpleGift »

Another aspect worth considering about REITs is their role in the portfolio as inflation protection, and not just diversification. Based on the studies I've seen, there seems to be strong evidence that publicly-traded equity REITs (such as Vanguard's REIT Index) have historically provided effective inflation protection for U.S. investors. For example:

Inflation and Real Estate Investments, by Case & Wachter, 2011.
Case & Wachter wrote:The empirical evidence examined in this paper suggests that a variety of assets have inflation-protecting characteristics. Real estate, considered a strong inflation hedge on conceptual grounds, has in fact performed as well as, or better than, other inflation-sensitive assets in the historical sample considered, and has not exposed investors to significant directional inflation risk. Indeed, based on both empirical results and theoretical arguments, real estate, accessed through publicly traded equity REITs, provides attractive return characteristics and deserves consideration in diversified inflation-protected portfolios.
Since inflation-protection is an important part of my portfolio design and financial plan — and I live in the U.S. and am subject to the inflation here domestically — then I've been more inclined to stick with U.S. equity REITs. When I've considered adding international REITs to my portfolio, the nagging question has always been: Over time, how closely correlated will they be with U.S. inflation?
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Leif
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Re: US REITs already have international exposure

Post by Leif »

While I'm a S&D advocate I really cannot get excited over intl REITs. Not that I buy into the OPs argument, but I'm not sure they are as mature and developed as in the US. I don't have a problem with Intl in general (I have 40% in Intl).
Median Joe
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Re: US REITs already have international exposure

Post by Median Joe »

Doesn't the same argument apply to Total Stock Market (VTSMX) too?
US companies in that fund also have good amount of international exposure.
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Re: US REITs already have international exposure

Post by Valuethinker »

Simplegift wrote:Another aspect worth considering about REITs is their role in the portfolio as inflation protection, and not just diversification. Based on the studies I've seen, there seems to be strong evidence that publicly-traded equity REITs (such as Vanguard's REIT Index) have historically provided effective inflation protection for U.S. investors. For example:

Inflation and Real Estate Investments, by Case & Wachter, 2011.
Case & Wachter wrote:The empirical evidence examined in this paper suggests that a variety of assets have inflation-protecting characteristics. Real estate, considered a strong inflation hedge on conceptual grounds, has in fact performed as well as, or better than, other inflation-sensitive assets in the historical sample considered, and has not exposed investors to significant directional inflation risk. Indeed, based on both empirical results and theoretical arguments, real estate, accessed through publicly traded equity REITs, provides attractive return characteristics and deserves consideration in diversified inflation-protected portfolios.
Since inflation-protection is an important part of my portfolio design and financial plan — and I live in the U.S. and am subject to the inflation here domestically — then I've been more inclined to stick with U.S. equity REITs. When I've considered adding international REITs to my portfolio, the nagging question has always been: Over time, how closely correlated will they be with U.S. inflation?
You are right the inflation protection is a key argument for RE investing, REITs are the best way to do it for the individual investor (who lacks access to TIAA RE fund) if tax protected space is available.

In theory the difference between US inflation and foreign inflation is reflected in the currency movements (Purchasing Power Parity). Empirical evidence says this only holds in the long run, if at all.

So you are unlikely to get much inflation protection that you couldn't get from US REITs. The main issue is a valuation argument, are foreign RE stocks cheap?, and if so might they move towards US valuation levels? Larry Swedroe looks at PE and says yes (or did, RE has had a bit of a tear recently) probably Price to Book is the best measure that has some reality to the true value of the underlying assets and is less subject to accounting distortions. That or dividend to price (ie yield). But then you get into tax questions (does foreign dividend withholding tax hit a US investor, in a tax protected space?).

The other issue is the thinness of foreign RE coverage. We are talking here about a handful of countries (Hong Kong, Australia, UK, Singapore, etc.). It's not as mature and well developed a sector as it is in the USA. So how much diversification are you buying?
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Re: US REITs already have international exposure

Post by abuss368 »

Dario33 wrote:Interesting topic and one I go back and forth on as well. Valid arguments on both sides of the aisle. I currently have 20% of my stocks in International - I did the same with REITs. Yes, it's another fund, but in my mind the simplicity remains manageable since I'm mirroring the same model I practice for stock allocations.
That is our strategy as well. We invest in Total US and International stock funds and also the US and International REIT funds. This comprises the equity side of the portfolio. Other investors may prefer Total US and International stock funds with US and International small value.
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Re: US REITs already have international exposure

Post by abuss368 »

REITs are often the best form of real estate investing for individual investors. This subject could be debated forever. However, there are convincing arguments for REIT investing compared to direct real estate investing.

REITs provide:

* access to real estate
* low costs
* constant cash flow from dividend income
* additional diversification to a portfolio
* liquidity (this is huge)
* better real estate diversification than owning a rental property
* simplicity (no business work from tenet's, repairs, etc.)

The four major asset classes to investing: stocks, bonds, real estate, and cash.

Please consider reading the excellent investment book by David Swensen "Unconventional Success". He recommends REITs and talks in depth on the Vanguard US REIT Index Fund. Now the book was published in 2005 (I wish he would update the book as he did with his first book), which was a little before international REITs hit the mainstream.

Best.
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Re: US REITs already have international exposure

Post by abuss368 »

Here are a couple of excellent sources of REIT information and education:

* http://www.reit.com

* Ralph Block "Investing In REITs" book
John C. Bogle: “Simplicity is the master key to financial success."
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