- In 2016, 18 of the 23 European housing markets boomed, according to the research firm Global Property Guide.
- Global real estate funds are turning in double-digit performance this year.
- Yields are higher on overseas real estate ETFs than on U.S.-focused property funds.
- Global real estate stocks have much more room for price growth.
- The Vanguard Global ex-U.S. Real Estate ETF has a price-to-earnings ratio of 13.45. The U.S. real estate fund counterpart from Vanguard has a price-to-earnings ratio of 34.17.
After years of being hammered, housing prices in Europe — and Asia, too — are finally surging.
Yet investors are mostly sticking to equities that invest in the U.S. residential housing market, which is a microcosm of the provincial approach investors take when it comes to investing in stocks. And at a time when investors are flocking to international equity bets overall as a way to find better valuations than in the U.S. market.
With international real estate, investors are forsaking big income bets, giving up higher yields and better returns at a lower price-to-earnings ratio. Last year 18 of the 23 European housing markets boomed, according to the research firm Global Property Guide, and show no signs of slowing. New Zealand, China and Canada were also strong.
“There is a real opportunity here,” said Duncan Rolph, a managing partner at Miracle Mile Advisors in Los Angeles. “International real estate funds are priced less than U.S. [funds]. Yet they pay dividends over 4 percent.”
The Vanguard Global ex-US Real Estate ETF (VNQI) fund is the best example. The fund currently has a 12-month yield of 4.58 percent, according to Morningstar, and has notched a price return of 12.12 percent as of May 19. And the expense ratio is a measly 0.15 percent.
Last week Moody’s downgraded China’s credit rating based on the risk that there will be too much debt used to fuel the economy as China’s growth rate slows.
“There are better places to invest,” Rosenbluth said, adding that investors are paying a high price of 0.70 percent annually for the fund. He pointed back to VNQI, which is a much broader way to invest in global real estate that includes exposure to China but does not concentrate its bets there.
Mishra said analysts usually prefer to use cash flow and capitalization rates to value REIT stocks rather than P/E ratios alone. And there are many other factors that will influence price swings in specific markets around the globe. Currency is one: the British pound’s fall after Brexit led to a rise in Chinese purchases of London properties since those properties became much cheaper in yuan. Macroeconomic policy also plays a big role: Japanese REITs may continue to go up due to massive purchases by the Bank of Japan and ultra-low interest rates, even though they look expensive.
“I think the main reason why investors should consider adding some international real estate exposure in their portfolios is the diversification benefits,” Mishra said.