Investing in real estate investment trusts, or REITs, has long been identified as a solid strategy for diversifying a portfolio. In the last decade, more and more global real estate markets have opened up, thereby allowing investors to move beyond traditional REIT markets such as Britain, the United States, and Japan.
International REITs pose some risks. Like REITs in general, they may not be tax efficient. More importantly, REITs that include properties in developing markets may lack many of the protections as well as the transparency enjoyed by those in more established, developed economies. A risk-averse investor should consider avoiding such REITs and focus on opportunities in countries with developed economies, such as Japan, Europe, or Australia.
Despite the drawbacks, international REITs offer a great deal of investment potential. Unlike direct investment in the global real estate market, an international REIT is more liquid, thus allowing a greater degree of flexibility in a portfolio. This enables an investor to more easily diversify or rebalance as needed.
In addition to the strategic benefits, international REITs have exhibited favorable returns in recent years—and they have done so with volatilities comparable to other core asset classes. Moreover, their attractiveness is making them increasingly accessible, as providers offer an ever-growing spectrum of international REIT products.
As the global real estate market continues to evolve, investments such as international REITs in both developed and emerging markets are likely to continue to offer serious investors an attractive option for portfolio diversification.