Australian investors turning to the real estate investment trust market as a bond proxy should look further afield to the global REIT sector, according to new analysis.
Exchange traded fund issuer VanEck has produced a paper on the global REIT sector, The Proper(ty) Allocation, which argues can add yield and diversification to their portfolios with global REIT exposure.
VanEck listed an international REIT ETF on the ASX in April. The index fund, which has hedged currency exposure, replicates the FTSE EPRA Nareit Developed ex-Australia Rental Index, which has increased by an average of 7.9 per cent a year over the past five years. The management fee is 43 basis points.
“Many Australian portfolios include local real estate investment trusts, which provide reliable income streams. However, few investors hold international REITs,” the report says.
“Property assets typically earn reliable income from rent, which provides a regular income stream. Rents may be linked to inflation, which means the income increases with the cost of living.”
There are 44 REITs listed on the ASX, down from 71 in 2006. A number have been sold to overseas buyers. As a result, there are fewer local opportunities in the sector.
The FTSE EPRA Nareit, includes 334 securities in 20 countries. The composition of the REITs in the index is 31 per cent retail, 35 per cent diversified, 13 per cent office, 20 per cent industrial and 1 per cent specialised.
International REITs have a low correlation to other asset classes, with a correlation of 0.49 to Australian equities, 0.3 to international equities and 0.33 to Australian bonds over the past five years.
VanEck’s analysis shows an increase in portfolio returns with the inclusion if international REITs, without incurring significant additional risk.
Over the past 10 years international REIT yields have hovered around 4 per cent.
VanEck says international REIT balance sheets are in good shape, with reduced gearing and low interest rates. The average ratio of debt to assets, at around 35 per cent, is at its lowest level for around 20 years ad well below the levels that caused the sector problems during te financial crisis in 2008.