Wealth Finance

When investors aim to diversify their stock portfolios, then investing in real estate investment trusts (REITS) is highly preferred. According to reports from the Association of Real Estate Investment Trusts (NAREIT), it was observed that the global real estate market represented more than $900 billion of equity capitalization.

Time Line:

If we take a look at the time line, it was also observed that these trust had been available to only a few places. The publicly-traded real estate investment trusts were thus offered to a list of countries, which includes the likes of U.S. or Australia. However, now other foreign countries are also adapting to these structures.

Nowadays, it is advised that a more sound and holistic approach be adopted towards an international REIT portfolio since it deems more suitable. It so happens that when an investment portfolio is expanded, an inclusion of international real estate aims to provide opportunities for potential return opportunities.

Furthermore, with such conditions, the portfolio risk is also further subdued. This means, that there is only one thing that needs to e looked at, and that is the location.

REIT Universe:

To start with, a deeper look needs to be drawn towards the REIT universe. For those who don’t know, an REIT is a corporation. This firm aims to purchase, own and manage real estate properties and mortgage loans. In REITs, there is a certain tax status that allows them to maintain a shield from the corporate tax. This status is observed once the income that is distributed to the investors remains until 90 percent.Furthermore, the losses can be passed through once this structure manages to avoid the double taxation to shareholders.

Benefits:

One of the major benefits that can be attained from the REITs is that the real estate portfolios can be efficiently and effectively diversified. This is so because these REITs are more liquid as compared to the direct equity real estate investments.

Hence, one big advantage fro the REITs are of the diversification. Further, as the investor’s main focus is to locate asset classes that offer low correlations to other positions, they can do this with the help of REITs as lower the correlation, the lower the idiosyncratic risk becomes.

Concerns:

After recognizing the benefits, some concerns also become apparent to investing in international REITs.

The reason being, when investment is made abroad, the equities or real estate, carries with it some implied risk. This clause is much apparent when direct investments in foreign securities are made.

Of curse, transparency and governance in these processes can never be perfect except, they have improved to a great extent. However, when it comes to investment, the risks that are associated with the direct investment can be avoided if the investment is made indirectly through the domestically based mutual funds.

Tax efficiency is also one of the concerns that arise when considering investment in the foreign markets. It has been observed that the international REIT funds can be highly tax inefficient at times, which is exactly like their U.S. counterparts. The investors can thus use asset location strategies, which should be limited to the tax-free or tax-deferred accounts such as IRAs or 401(k) s.

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