By The Sizemore Letter
Every portfolio needs an allocation to real estate. It is an income-producing asset class with a strong built-in inflation hedge and favorable tax treatment. And at a time when paper profits can be fleeting, real property can offer a stable store of value. What more can you ask for in an investment?
But investors who focus exclusively on U.S. REITs are missing out on a world of potential opportunities.
In my last article on international real estate investing, I gave the rundown on British REITs. Today, we’re going to move further east.
Outside of the United States and Britain, the largest and most liquid REIT stocks are in Japan, Hong Kong, Singapore, and Australia.
We’ll start with Japan’s largest property developer, Mitsubishi Estate (Japan: 8802, OTC:MITEY). Mitsubishi Estate is not a REIT, per se, though it does act as an asset manager for Japanese REITs (“J-REITS”), and its size and importance to the Japanese real estate market make a mention of it unavoidable. (On a side note, Mitsubishi gained notoriety by buying the Rockefeller Center in New York in 1989.)
If you are a believer in Abenomics—or believe that Japanese inflation is right around the corner—then Mitsubishi is an attractive option. But I would tread carefully here. The stock pays virtually nothing in dividends, and given the debt and demographic issues the country faces, I can think of a lot of other assets I would prefer to own than Japanese real estate. At the risk of being overly simplistic, a shrinking Japanese population means less demand for residential, retail, and office properties in the years ahead…which should mean lower rents and higher vacancies for landlords.
Still, if you’re bound and determined to invest in Japanese real estate, the Nippon Building Fund (Japan:8951) offers a respectable dividend yield at 3.01%, has a reasonably large market cap at nearly $8 billion, and has better liquidity that most J-REITs.
Moving on to more promising countries, let’s take a look at Hong Kong and Singapore.
I’ll start with The Link REIT (Hong Kong: 823, OTC:LKREF), the first Hong-Kong-listed REIT and one of the largest in the world by market cap. The Link’s property empire boasts 11 million square feet of retail space and approximately 80,000 garage parking spaces. This is a veritable Hong Kong property juggernaut.
Following most income-oriented investments, the Link has had a rough couple of months. After peaking in July, the REIT shed nearly a quarter of its value in the “taper scare” that followed. But if you’re broadly bullish about Asia’s prospects and about Hong Kong as one of its premier financial and business centers, then there is a lot to like in the Link. Shares trade at book value and yield 4.05% in dividends. And unlike real estate investments in much of the rest of the world, the Link actually grew its dividends throughout the crisis. The REIT has raised its dividend every year since 2006.
Moving to nearby Singapore, we see much the same story. Rising bond yields caused an across-the-board sell-off in income stocks such as REITs, many of which now offer very attractive yields. Take CapitaCommercial Trust (Singapore:C61U, OTC:CMIAF). Singapore’s first—and largest—publically-traded office REIT sports a dividend yield of 5.96% and trades at a 20% discount to book value.
CapitaCommercial invests primarily in office buildings, which took a beating during the global financial crisis. But with Singapore’s supply of quality office space starting to get tight, rents are expected to rise significantly over the next few years. And importantly, the REIT was able to maintain and raise its dividend throughout the hard times. Of all the REITs discussed in this article so far, I consider CapitaCommerical Trust to be the most attractive, both as a short-term trade and as a long-term income investment.
And finally, we get to Australia. I’m a little wary of investing in Aussie property at this time, as the global commodities boom that has underpinned the country’s prosperity is, in all likelihood, dead for the foreseeable future. After more than a decade of solid gains, I expect the Aussie dollar to drift lower in the years ahead, which will eat into any would-be capital gains and dividends for foreign investors.
I’m not a doom-and-gloomer, and I’m not expecting a major crash in Australia. In fact, I’m actually very impressed with the country’s fiscal management. Virtually alone in the developed world, Australia has no sovereign debt problem. At just 29% of GDP, Australia’s debts are about one third of the American and European average and one eighth of Japan’s gargantuan debt load. This is a country with its fiscal house in order.
Unfortunately, it’s also a country with some of the world’s most unaffordable housing, raising the possibility of a broad-based housing crash that would weaken Australia’s banking sector.
If you’re dead set on buying Aussie real estate, I would go for a diversified option like Stockland (Australia:SGP, OTC:STKAF), Australia’s largest and most diversified REIT. The company develops and manages retail centers, residential communities and office and industrial properties.
Stockland trades at a slight premium to book value and pays a 6.45% dividend.
NOTE: Most of the securities covered here trade in the U.S. as ADRs, and I included the ticker symbols to help you identify them. But if you decide to try your luck on any of these, I recommend you trade the shares in the local market where the liquidity is better. Most of the ADRs listed in this article are thinly traded and will not be appropriate for most investors.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he had no position in any stock mentioned. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”
This article first appeared on Sizemore Insights as International REITs: Looking to Asia
