{"id":41433,"date":"2013-08-28T11:39:49","date_gmt":"2013-08-28T15:39:49","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=41433"},"modified":"2013-08-28T11:39:49","modified_gmt":"2013-08-28T15:39:49","slug":"investing-in-british-reits","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/08\/28\/investing-in-british-reits\/","title":{"rendered":"Investing in British REITs"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/p>\n

REITs have become a portfolio staple for income investors over the past decade and rightfully so.\u00a0 There are few investable options that offer the same potential for a high and rising cash payout, a built-in inflation hedge, and diversified exposure to an asset class\u2014commercial real estate\u2014that would otherwise be off limits to most individual investors.<\/p>\n

I\u2019m a big believer in REITs, and I own a couple\u2014such as Realty Income<\/b> (<\/span>O<\/a>)<\/span> and National Retail Properties <\/b>(<\/span>NNN<\/a>)<\/span> that I hope to never sell.\u00a0\u00a0 I plan on using their income streams to pay my bills in retirement\u2026and if my kids are smart, they will hold on to the shares long after I\u2019m gone. \u00a0\u00a0There is no such thing as a \u201crisk free\u201d investment, but a high-quality, cash-flowing property portfolio is the closest thing I\u2019ve found.<\/p>\n

The REIT structure was invented in the United States, and the vast majority of all traded REITs are American.\u00a0 But the idea has caught on overseas as well, particularly in the UK and parts of Asia.<\/p>\n

Should you consider international REITs in a diversified income portfolio?<\/p>\n

Absolutely.\u00a0 Today, we\u2019re going to take a look at some of the investable options starting with the UK.<\/p>\n

But first, I have a confession: I religiously watch Downton Abbey.<\/i>\u00a0 It\u2019s a hobby I generally keep in the closet (I live in Texas\u2026what would the neighbors say), but I consider it one of the best-produced series of the past decade.\u00a0 The series shows the evolution of the aristocratic Crawley family and how they adapt to a changing world.\u00a0 Their traditional lifestyle is turned upside down by the rise of the new middle class and by the rise of modern industrial farming.<\/p>\n

The characters in the show are purely fictional.\u00a0 But have you ever wondered what happened to the real-life equivalents the Earl and Countess of Grantham?<\/p>\n

The successful ones turned their landed estates into diversified property empires. With a fortune estimated at $18 billion, Gerald Grosvenor\u2014the Duke of Westminster\u2014is the wealthiest person in Britain via his interests in the Grosvenor Group, a property corporation with offices in 18 cities worldwide that happens to sit on some of the most valuable land in the West End of London.<\/p>\n

\"Robert-Earl-of-Grantham-Hugh-Bonneville-downton-abbey-15932405-570-364\"<\/a><\/p>\n

He should have taken investment advice from the Duke of Westminster.<\/p>\n<\/div>\n

Unfortunately, you can\u2019t invest with the Duke unless you are a high-net worth individual or a large institutional investor.\u00a0 But there are plenty of publicly-traded British REITs to choose from.<\/p>\n

I\u2019ll start with the largest, Land Securities <\/b>(UK:LAND, OTC:$<\/span>LSGOF<\/a>).\u00a0\u00a0 Land Securities\u2014which holds a mix of office, retail, and residential properties\u2014is heavily weighted in London, which has been a major boost for the portfolio.\u00a0 Even while the rest of the country has seen property values languish over the past five years, prices in London\u2019s posh neighborhoods\u2014which are at new all-time highs\u2014make it look like 2006 all over again.\u00a0 London property has been a favored haven for the world\u2019s wealthy, and particularly the wealthy from Russia and the Arab world.\u00a0 (On a side note, Land Securities also owns the iconic neon billboards in Piccadilly Circus.)<\/p>\n

Land Securities is reasonably cheap, trading at about a 5% discount to book value. \u00a0But this is only cheap if you consider the underlying property itself to be reasonably priced.\u00a0 The stock yields 3.35% in dividends, which is a little on the skimpy side for a REIT.\u00a0 And the company cut the dividend<\/a> during the pits of the 2008-2009 financial crisis, which is a cardinal sin for an income investment.<\/p>\n

So, Land Securities is essentially a bet on London property prices and on the success of new developments, making far more of a growth investment than a pure income investment.<\/p>\n

Next on the list is British Land<\/b> (UK:BLND, OTC: $<\/span>BTLCY<\/a>), which is also heavily weighted in London.\u00a0\u00a0 British Land\u2019s portfolio is more heavily weighted in retail properties, which account for about half of its holdings.<\/p>\n

At 4.7%, British Land sports a more attractive dividend yield, though the company\u2019s payout has actually shrunk a little from its pre-crisis levels<\/a>.\u00a0 It also trades at a slight discount to book value (a little less than 3%).<\/p>\n

For a more diversified choice, take a look at Hammerson PLC<\/b> (OTC: $<\/span>HMSNF<\/a>, UK:HMSO).\u00a0 Hammerson is a diversified retail REIT with properties scattered across the UK.\u00a0\u00a0\u00a0 It also owns a fair number of properties in Germany, Spain, and France.<\/p>\n

Having less exposure to London, Hammerson has benefitted less from the boom in that market.\u00a0 But as Europe\u2019s capital markets return to \u201cnormal,\u201d Hammerson may have the best upside from this point on.<\/p>\n

Hammerson trades at an 11% discount to book value and yields a modest 3.74% in dividends.\u00a0 Like the other REITs covered, Hammerson hit a rough patch during the financial crisis and was forced to issue new stock and reduce its dividend per share, though the dividend has been steadily rising since 2010.<\/p>\n

Before you run out and buy British REITs, there are a couple points to consider:<\/p>\n

    \n
  1. The REIT structure is still relatively new to the UK, having been introduced in 2007.\u00a0 Most British REITs were originally property development companies rather than semi-passive landlords.\u00a0 As such, they tend to be more growth-focused than purely income focused.\u00a0 The U.S. REIT market has its share of growth-and-development-oriented REITs as well\u2014think Vornado<\/b> (<\/span>VNO<\/a>)<\/span>\u2014but the sector as a whole is more oriented towards current income.<\/li>\n
  2. Many British REITs trade in the U.S. as ADRs, but I do NOT recommend buying them.\u00a0 Even though each of the REITs mentioned is a multi-billion-dollar enterprise, the trading volumes on the ADRs is almost nil.\u00a0 You\u2019re much better off buying the London-listed shares.\u00a0 These days, it\u2019s not particularly hard to trade on foreign markets.\u00a0 Depending on who you use for brokerage, you may need to call the order in via phone rather than using the standard website interface.\u00a0\u00a0 And if you have any questions, that is exactly what I suggest you do.\u00a0 If you are new to international markets, I recommend you call your broker and have them walk you through the process.<\/li>\n<\/ol>\n

    British REITs are not the only non-U.S. option.\u00a0 In Part II, we\u2019ll take a look at options in Asia.<\/p>\n

    Charles Lewis Sizemore, CFA, is the editor of the\u00a0Sizemore Investment Letter<\/a>\u00a0and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he was long NNN and O.\u00a0Click here<\/a>\u00a0to learn about his top 5 global investing trends and get your copy of \u201cThe Top 5 Million Dollar Trends of 2013.\u201d<\/em><\/p>\n

    This article first appeared on Sizemore Insights as Investing in British REITs<\/a><\/p>\n

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