International REITs

According to FTSE EPRA/NAREIT at the end of July 2012, the global real estate securities market consisted of 20 countries in developed markets (286 companies) and of 17 countries in emerging markets (126 publicly traded equity REITs and listed property companies). Geographically, REIT and real estate securities markets are spread across the Americas, Europe, the Middle East, Africa, and Asia. For a U.S. domiciled investor, international REITS make up the global market ex U.S securities. The U.S. securitized real estate market makes up roughly one third of the capitalization of the global market.

National REIT markets


The United States, in 1960, was the first country to institute the REIT structure for holding commercial real estate. Australia created its REIT structure in 1971. Beginning in 2000 an increasing number of nations have legislated REIT structures. In international markets, especially emerging markets, a frequent vehicle for investing in commercial real estate is a Real Estate Operating Company (REOC). Whereas a REIT distributes earnings to shareholders, a REOC reinvests earnings into the business. The table below provides a listing of nations now employing REIT structures for securitized real estate investment.

Role of international REITs in an investment portfolio
For portfolios that include an allocation to domestic real estate securities, the arguments for inclusion of international reits include:
 * Diversifying the risk of a single domestic real estate market by accessing a wider universe of real estate companies. This argument is similar to the basic argument for adding international stocks to a domestic stock portfolio. For U.S. investors, domestic real estate securities provide access to about one third of the global real estate markets.
 * International real estate markets exhibit lower correlations between regions, thus offering a potential diversification benefit. Vanguard research indicates that  the rolling annual correlation between international reits and US reits (1990-2010, measured by S&P indexes) ranges from -0.4 to 0.85. International reits also provide varying correlations with US stocks, US bonds, US cash, and international securities markets.
 * Wilshire argues that target retirement funds employing global real estate allocations should allocate between 7% to 15% of the portfolio to a global real estate index fund.

Caveats regarding using an international REIT fund include the following.
 * If one is a total market investor, the international total market index funds hold the market capitalization of international real estate securities.
 * An international REIT fund creates an asset location issue due to the fact that international reits have comparatively high dividend distribution that is mostly taxed at marginal income tax rates. The expected high distributions, mostly non-qualified, suggest that international REITs are candidates for placement in tax-deferred or tax-free investment accounts. However, to the extent that income is taxed by local national governments, the fund's dividend distribution may qualify for a foreign tax credit, which is foregone if the fund is held in a tax-advantaged account. In sum, most foreign REIT index funds and ETFs have a foreign tax credit of only 5% of the dividend yield (see, for example, Vanguard Foreign Tax worksheets for Vanguard's fund); therefore, the high tax rate is the more important cost factor and the funds are better held in tax-advantaged accounts.

The table below provides returns data for the FTSE/EPRA NAREIT series of developed market real estate securities indexes. The global index includes the North American (US and Canada), European, and Asian indexes. For comparative purposes, the table includes these regional indexes, the US domestic reit index, and the global index. The blue colored cells indicate the highest performing index for each year; the red colored cells indicate the lowest performing index for each year. The second tab provides the income portion of each index's annual return.

International REIT indices
The following index providers all have index tracking funds/ETFs linked to one or more of their indices:

Funds
Indexed exchange traded funds covering international REITS are provided by Ishares, State Street, Vanguard, and Wisdom Tree. Passively managed international REIT mutual funds are provided by DFA and Vanguard. Index mutual funds that track global real estate companies are provided by Index Trust and Northern Trust.

Articles

 * Introduction to International REITS, Cathy Pareto,CFP, AIF, investopedia
 * The Role of REITs and Listed Real Estate Equities in Target Date Fund Asset Allocations, Wilshire Associates, March 2012
 * REITs: Effective exposure to commercial real estate?, Vanguard Institutional, 03/23/2011.