Adding REITs to your financial portfolio is a smart move. While the real estate investment trust (REIT) concept was developed in the United States, it has since spread internationally. In other words, they provide entry to promising markets. These securities may be of interest to international buyers seeking a broader range of stock market exposure.
Because of their independence from the U.S. real estate market, international real estate investment trusts (REITs) are a valuable tool for portfolio diversification.
REITs: What Do They Mean?
REITs are financial institutions that invest in and manage commercial properties for profit. Loans and debt obligations backed by real estate collateral are another investment option for some REITs. In the United States, most significant REITs are listed on stock markets for public trading.
If a REIT pays out 90% or more of its revenue to its shareholders, it is exempt from paying corporate income tax. However, it is essential to remember that the structure of a REIT does not entail that investors would receive the benefit of the company's tax losses in the form of carry-forwards or reductions of capital gains.
If you're looking to diversify your portfolio, why not consider investing in an international real estate investment trust?
Real estate investment trusts (REITs) offer various domestic and international advantages. Financial advisory firm Morningstar showed that holding REITs enhanced long-term total returns and reduced overall portfolio risk for investors holding both equities and fixed income.
U.S. investors might often benefit from even more diversity by purchasing foreign REITs. The properties are not dependent on the U.S. real estate market. The correlation coefficients of foreign REITs with the home markets in their home countries are likewise relatively low. For these reasons, they are an excellent diversification choice.
Keep in mind that investing in global real estate funds that track a global real estate index is a great way to increase your portfolio's diversification.
Understanding International Real Estate Investment Trusts
After a prosperous start in the United States, REITs have spread internationally. There are a number of advantages and disadvantages to using them. However, they are a valuable addition to a diversified international portfolio.
The Pros of Investing in Foreign Real Estate Investment Trusts
Many believe that real estate is an excellent way to protect their wealth against inflation because property values tend to rise over time, even while currencies lose value. Since dividends are subject to taxation, many REITs provide attractive returns. Because of the need to pay dividends to shareholders, real estate investment trusts (REITs) rarely have spare cash to put toward management's pet projects.
Real estate investment trusts (REITs) are a valuable tool for broadening the scope of a stock portfolio. They are not equities or bonds, which are the asset classes to which they belong. You can't even begin to compare them to the United States because they are far apart.
Consequences of International Real Estate Investment Trusts
Despite many potential benefits, investment in international REITs carries a high degree of danger. Land rights and taxation are political flashpoints in many nations with less established real estate markets than in the United States. Foreign stocks in general, and real estate investment trusts (REITs) in particular due to the size of their dividend payments, are vulnerable to fluctuations in the exchange rate.
If you're taxed at regular income rates, investing in a foreign REIT may not be a wise financial decision. The illiquidity and lack of transparency of some foreign real estate investment trusts are significant concerns. If your horizons are too short, this might be pretty dangerous.
Advantageous Real Estate Investment Trusts
Exchange-traded funds (ETFs) are the most convenient vehicle for investing in overseas real estate investment trusts (ETFs). Although many exchange-traded funds (ETFs) don't provide dividend payouts, investors who reinvest their income may be able to earn capital gains.
If you find other REITs with higher yields, you may decide to invest in those instead. Popular international REIT exchange-traded funds include:
Exchange Traded Fund: Dow Jones International Real Estate (RWO) A Real Estate Investment Trust Tracking the Performance of the FTSE EPRA/NAREIT Development Index (IFGL)
What It Comes Down To
Real estate investment trusts (REITs) that operate in multiple countries are a fantastic way to spread risk. By doing so, they broaden their view of the global property market. Given that these REITs are traded on a U.S. exchange, exchange-traded funds (ETFs) are often the best option to invest in them. When compared to individual international REITs, ETFs offer more liquidity.
