|
New ETFs capture foreign real estate stocks
As U.S. market sputters, trio of funds invest in overseas land developers
By John Spence, MarketWatch
Last Update: 3:27 PM ET Aug 19, 2007
BOSTON (MarketWatch) -- Now that U.S. commercial real estate stocks have followed the residential housing market into the gutter as mortgage woes spread, more investors are looking to put overseas properties in their portfolios.
Investors are getting help in pursuing international realty stocks from a trio of low-cost, diversified exchange-traded funds. The increasing number of options comes as institutional investors such as pension funds have been ratcheting up exposure to commercial real estate and are increasingly searching overseas to further diversify their stock and bond portfolios.
But the ETFs are not without risk, as the credit crunch is making its presence felt around the globe. Real estate stocks worldwide may endure heightened volatility as investors struggle to grasp the extent of the damage in the mortgage market.
One of the easiest ways to participate in the market is through real estate investment trusts, or REITs. These publicly traded companies, which were established by the U.S. government in the 1960s, own and operate commercial real estate properties such as apartments, offices and warehouses. They are required to pay out 90% of their taxable net income to shareholders in the form of dividends.
So-called equity REITs manage income-producing real estate, while mortgage REITs, which have come under fire recently due to problems rippling out from the subprime sector, lend money and collect the interest payments.
Heading into 2007, U.S.-based REITs had outperformed the stock market for seven years running. But the sector has suffered a sharp pullback so far this year and the feverish pace of merger-and-acquisition activity has slowed. Through Aug. 17, the Dow Jones Wilshire REIT ETF RWR was down 13.3% and was lagging the S&P 500 Index SPX by 14 percentage points, according to investment researcher Morningstar Inc.
The SPDR Dow Jones Wilshire International Real Estate ETF RWX had been holding up relatively well until liquidity fears really started to shake markets last week. It was off 9.9% year to date through Aug. 17. State Street Global Advisors launched this first ETF tracking foreign real-estate stocks in December 2006, and it has gotten a warm reception, recently breaking through $1 billion in assets.
The ETF, which has an expense ratio of 0.6%, recently got some competition.
On June 5, WisdomTree Investments Inc. WSDT listed WisdomTree International Real Estate Fund DRW on the American Stock Exchange, with fees of 0.58%. And earlier this month, Barclays Global Investors got into the game with iShares S&P World ex-U.S. Property Index Fund WPS, which levies 0.48% and trades on the New York Stock Exchange.
The ETFs run by Barclays and State Street weight companies by market capitalization, while the WisdomTree offering takes a different tack by weighting stocks by their dividend yields.
Australia, Hong Kong, Japan and the U.K. tend to be among the largest country allocations for all three ETFs. Top holdings include companies such as Westfield Group , Unibail-Rodamco and Land Securities .
The case for international real estate
Institutional investors like investing in commercial real estate for the income and noncorrelation benefits, since the asset class tends to behave differently than stocks and fixed-income investments. To diversify even further, they're looking to foreign shores.
"U.S. investors have started to appreciate the size of the international real estate market," said Amos Rogers, managing director of Boston-based Tuckerman Group, which is a real estate investment advisory firm and member of State Street Global Alliance LLC.
"The primary driver is investors seeing the low correlations and diversification benefits," he said. A cornerstone of portfolio management is that investments that zig when others tend to zag can reduce overall risk.
Additionally, investors are concerned about valuations in U.S. real-estate stocks after years of outperformance, Rogers said. "Some international markets are just starting to grow, and there are better values perceived to be had overseas," he added.
The size of the international REIT market has grown in recent years as more countries have adopted the U.S. structure, which provides better transparency and reporting standards. "I believe REITs will become the predominant vehicle for publicly traded real estate in the future," Rogers said.
However, the ETFs invest in publicly traded real estate management and development companies that don't have the REIT structure.
May be bumps
"We like international real estate stocks because the valuations are better," said Marc Rappaport, senior managing director at Alpine Woods Capital Investors LLC.
Still, he said the current credit shake-up could lead to bumps for real estate stocks around the globe. "Companies can be very strong, but you're thrown into market psychology, which is driven by fear and greed," Rappaport said.
Fears in the mortgage markets have spilled over to affect financials and real estate companies. "It's something to keep an eye on, and we take it seriously," he said.
Bruce Lavine, chief operating officer at WisdomTree, said the New York-based firm heard strong demand for international real estate ETFs.
"There are not a lot of options or alternatives for international real estate for the investor on the street," he said. "Investors have had a good run with domestic real estate, but now the international market is looking cheap relative to the U.S."
These days, about half of the companies that are classified as REITs reside outside the U.S., according to Jane Leung, a portfolio manager at Barclays Global Investors.
"As we continue to see increased interest in international investing, there will be more products like this," she said. The new ETF "can be an excellent investment for those who want to broaden exposure to international real estate markets and REITs," Leung said, adding that it can also provide another source of yield as well as capital appreciation.
|