Thursday, September 14, 2017

The Battle of International & American Real Estate

An area not talked about enough is the big disparity in International Real Estate(VNQI), and American Real Estate(VNQ) performance. Below is a chart depicting the performance for the last year.  You can see International based land and bricks are doing better than their American brethren.

Why is that?

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Is it simply because people want more exposure to international real estate?  That's possible, and not just from an American's perspective.  People in all the respective countries represented in the ETF could, for a variety of reasons, want more exposure to real estate. In times of uncertainty people look to park money in nice big tangible assets.  What better way to do it than by owning the warehouse and office buildings next door. I'd definitely say this year has been more uncertain than most too.

Another big reason is that overseas interest rates are still stuck in negative to near zero territory.  It's no secret that at many points in history interest rates correlate closely with real estate performance.  Although that relationship is not always precise. So at times when rates decline real estate goes up, and you get the drift. Let's take a look at this picture provided by Charlie Bilello at Pension Partners.

Just look at the the areas with negative Central Bank Rates, and then correlate that with the top countries held in VNQI.  Japan, Eurozone, United Kingdom, and Sweden all find themselves within the ETF's top 10 holdings by country. Coincidence then that the ETF has continued to surge with such a heavy weighting to these areas?

I think not.  But what would concern me is what happens when these countries start to raise rates?  I would think this period of out-performance would then begin to subside.

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