Buy or Sell: 3 Real Estate Plays Paying up to 8.6%

Brett Owens, Chief Investment Strategist
Updated: February 3, 2017

The headlines in the global real estate space are terrifying right now. It’s the kind of negative press you see in just two situations: the throes of a full-blown crash, or near a market top.

This is the latter.

Sure, high-yield opportunities are available – like the three REIT funds yielding 5% to 8.6% that I plan on highlighting for you today. But concern about a planet-wide real estate bubble is well-founded.

The Organisation for Economic Co-operation and Development believes various international markets’ property prices are reaching dangerous heights, and that several countries’ high prices were “not consistent with a stable real estate market,” according Britain’s The Telegraph. The U.K., Sweden and Canada are among the countries seeing property go through the roof.

Much of this has come courtesy of massive international buying by China, which dumped $33 billion into overseas real estate last year. The problem is, while China has helped prop up real estate globally, capital controls implemented late last year seem to be having the desired effect – but at the detriment of international real estate markets, which are seeing Chinese buyers exit in droves.

However, investors must weigh all of this bad news on the global front with a hot domestic property market, not to mention the general need to diversify not just by sector and asset – but geographically, too. But perhaps most tempting of all is the fact that international real estate funds offer some of the highest yields in global equity.

Today, we’ll look at three funds that sit squarely in the crossroads of high yield and high danger. And we’ll decide: Are they worth it?

Vanguard Global ex-U.S. Real Estate ETF (VNQI)
Dividend Yield: 5%
Expenses: 0.18%

The Vanguard Global ex-U.S. Real Estate ETF (VNQI) is the sister fund of the uber-popular Vanguard REIT ETF (VNQ), and like the VNQ, it’s one of the cheapest ways to buy a diversified basket of real estate stocks.

VNQI is an ex-U.S. fund that holds nearly 700 real estate investment trusts (REITs), providing extremely wide exposure. Moreover, the fund isn’t equally weighted and no single REIT makes up more than 3% of the fund. Better still, the top 10 holdings – which include Japan’s Mitsubishi Estate Co. (MITEY) and France’s Unibail Rodamco (UNRDY) – make up only 20% of the fund.

However, the fund becomes a little top-heavy at the geographic level. Japanese stocks make up 22% of the ETF’s assets, with Hong Kong (12%) and Australia (10%) also standing out as double-digit weights. All told, Pacific-area stocks comprise half the fund, with a quarter in Europe, and another 17% in emerging markets — an important potential source of growth for VNQI going forward.

Vanguard’s VNQI Makes Up for Performance With Big Income
VNQI-Price-Total-Return-Chart

As we’ve discussed before, Vanguard funds typically aren’t among the best sources of high-yield investments, but VNQI is among the provider’s top yielders, at roughly 5% currently.

And that yield is what has saved VNQI from lackluster price performance for the past few years – a running theme among international real estate ETFs over the past few years.

iShares International Developed Real Estate ETF (IFGL)
Dividend Yield: 7.6%
Expenses: 0.48%

Nearly everything about the iShares International Developed Real Estate ETF (IFGL) is similar to Vanguard’s VNQI, just more concentrated.

For instance, IFGL has just more than 200 holdings, spread across roughly 20 or so countries, versus VNQI’s nearly 700 holdings across about 40 countries. As a result, geographical holdings are more concentrated at the top – Japan at 24 percent of the fund, followed by Hong Kong (17%), Australia (13%) and the United Kingdom (10%).

Top holdings are only slightly thicker at the top, too, with Unibail and Mitsubishi at 3.6%, and Japan’s Mitsui Fudosan (MTSFF) and Hong Kong’s Sun Hung Kai Properties (SUHJY) at more than 3%.

Perhaps the most notable difference is that while VNQI has a 7% weighting in Chinese real estate, IFGL has no direct China holdings.

Dividends Save the Day for iShares’ IFGL
IFGL-Price-Total-Return-Chart

That lack of Chinese holdings is reflected in weaker price performance for IFGL, and a pricier expense ratio hasn’t helped investors, either. Still, hefty income has been a considerable salve for those who have held the ETF over the past few years.

SPDR Dow Jones International Real Estate ETF (RWX)
Dividend Yield: 8.6%
Expenses: 0.59%

The SPDR Dow Jones International Real Estate ETF (RWX) is the biggest player in the international REIT ETF world, boasting about $3.5 billion in assets under management.

It’s also the narrowest and most top-heavy of the three ETFs.

RWX holds just 119 international REITs, with Japan once again getting top billing, this time at just more than a quarter of the ETF’s weight. Australia makes up a full 15% of the fund, the U.K. 12% and France nearly 11%. Where RWX pulls back is Hong Kong, which makes up just 9% of the fund – and again, China is a no-show.

Overweights really begin to clump up in RWX, too. Mitsui Fudosan and Unibail each represent 6% weights in the fund, while Australia’s Scentre Group (STGPF) and Hong Kong’s Link Real Estate Investment Trust (LKREF) are 5% and 4% weights, respectively.

High Dividends Help SPDR’s RWX Navigate Rough Waters
RWX-Price-Total-Return-Chart

Again, international REITs have suffered over the past few years, and RWX is no exception. The ETF is trading at lows last plumbed in early 2016, and before that, 2013.

Good thing RWX has that 8% dividend, right? Well …

About Those Dividends …

This one chart provides one of the most important things that investors must know about international REIT ETFs:

International REIT Funds: These Yields Are on the Move!
RWX-IFGL-VNQI-Dividend-Yield-Chart

Simply put, their yields are all over the place. Because of the nature of REIT dividends and their ties to income, as well as the fact that international stocks tend to pay either semiannually or annually, instead of quarterly, causes massive shifts in the yield over time. Not to mention the effect of these funds’ price on the yields.

Just look at RWX, which has yielded anywhere between 11% and 2.5% over the past five years!

That doesn’t mean you won’t reap big income with international REITs – you can. But it does mean the dividend yield might not be the most reliable number. Between that and the rest of the dangers in the real estate market … well, handle these high-yield ETFs with care.

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