Wednesday, June 7, 2017

Does International Real Estate Have More Room To Run?

I was browsing various asset class performance via ETF's that I follow.  I happened to be looking at the Vanguard REIT ETF(VNQ) which focuses on the USA, and it's international counterpart Vanguard Global ex-US REIT ETF(VNQI).

I noticed there was quite a large difference in performance YTD.  Now the performance in the chart below does not include dividends, which are generally quite large for REIT's. There is also a large difference in yield between the two on a TTM basis.

YTD Performance         Dividend Yield(ttm)
VNQ -   0.95%                           2.89%
VNQI - 16.20%                         4.47%

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Now unfortunately VNQI was launched in November 2010 so we have less than 10 years worth of performance data to track. We could use another international real estate ETF, but I'd prefer not to for this short discussion.  Looking at Vanguards website we see that since inception VNQ has an average annual return of 8.94% versus a 5.72% return for VNQI.  Their data also shows the last year has been much better overall for VNQI than VNQ with an average annual gain of 10.39% vs 2.63%.

So why the difference?

I think it's a culmination of a few things.  For one it's possible that since rates in the US are heading up it's been depressing the valuations of US  real estate, and the opposite is true overseas where VNQI has the majority of it's holdings(i.e. Europe & Japan) with negative or ultra low rates. This theory is supported by the P/E & P/B ratio for each fund which shows VNQ is much more expensive.

                    P/E           P/B
VNQ           38.0          2.3
VNQI          11.7          1.1

 For American based investors chasing yield that could explain another portion.  Yield hungry investors can earn 1.58% more yield for essentially bricks in different countries, hence bidding up shares of VNQI this year.

But let's not forget the underlying stocks. They too must be going up in value in their home countries.  In times of economic uncertainty real estate is probably the most common hedge.  Looking around there is plenty of that, and when it comes with a nice dividend it's an even more desirable hedge.  Plenty of overseas investors are looking to park money somewhere safe as they ride out historically low interest rates, and choppy economic environments.  And with many countries artificially depressing interest rates for overseas investors real estate just makes perfect sense. 

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