Global REITs: Growth, Income and Stability for Baby Boomers

by Carl Delfeld

I suppose I’m like a lot of you Baby Boomers out there who are always looking for the elusive combination of growth, income and lower portfolio volatility.

It isn’t easy to find all three in one investment. Usually, high-growth investment opportunities come with low or zero dividends, plus higher risk and volatility.

One idea that gives you a chance to accomplish all three of these important goals is real estate investment trusts - usually referred to as REITs. You might think of REITs as real estate mutual funds.

REITs give you commercial and/or residential property exposure without all the hassles and lack of liquidity that go with buying and managing real estate on your own. Another advantage is that REITs have to distribute at least 90% of their taxable income to shareholders annually. In return, a company that qualifies as a REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income.

REITs have demonstrated strong long-term returns plus offer a nice hedge on inflation while studies show that a reasonable allocation to real estate reduces overall portfolio volatility.

Various Ways to Diversify With REITs

You could place a small bet on the anticipated recovery of the U.S. housing market through a residential REIT such as Sun Communities (NYSE: SUI). Sun, which sports a nice 6.4% current yield and is up 7.2% so far this year, manufactures, owns and develops 165 manufactured housing and recreational vehicle communities in 18 states, largely in the Southeastern and Midwestern regions of the United States.

While you’re at it, why not add some international and property exposure to your portfolio by investing in overseas property markets? One simple and low-cost way is through the WisdomTree Global ex-US Real Estate ETF (NYSE: DRW). DRW is a basket of international real estate companies weighted by dividends.

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It’s up 29% so far this year, with the top country weightings from Hong Kong, Singapore, Australia and Canada accounting for 63% of exposure.

These country weightings reflect that there’s now $475 billion of listed property in the Asia-Pacific region - greater than that trading in North America and almost double that of Europe.

And so far this year, four of the top 10 best-performing REITs with assets of more than $250 million in the Pacific region are from Singapore, according to data compiled by Bloomberg.

For example, according to a recent S&P report at the end of the second quarter, here’s how Asia-Pacific property markets stacked up against U.S. property markets:

ü  Offer a higher dividend yield than United States

ü  Trade at less than book value versus 2.4 times for United States Trade at much lower price to earnings than United States Earned a return on equity four times that of United States

Some of these REITs include Frasers Commercial Trust, AIMS AMP Capital Industrial REIT and Keppel Land Ltd.’s K-REIT Asia.

You could invest in these REITs through the Singapore stock market, but there are no ADRs traded on major U.S. exchanges.

To gain exposure to Singapore property markets, I recommend the relatively new iShares Singapore Small Cap Index Fund (NYSE: EWSS). This ETF seems to be the easiest way to capture Singapore property markets. And it’s far superior to the large-cap Singapore exchange-traded fund, iShares MSCI Singapore Index Fund (NYSE: EWS), for the following reasons:

First, 51.8% of the EWSS basket is property companies while for EWS it’s only 13.8%. EWSS is also cheaper than the large-cap EWS based on earnings, book value and sales.

While getting your portfolio ready for 2013, make sure you have some global real estate in the mix.

Good Investing,

Carl

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