Diversification with Reits
Context on Diversifiers: Inflation, Precious Metals, Oil Companies, and Reits
I went through William Bernstein's book Rational Expectation: Asset Allocation for Rational Adults. This is an excellent book that focuses on personal finance and obtaining sufficient funds to fund retirement.
Besides the key point which is to mind risk adjusted returns, another point is to manage diversification. Governement bonds are the conventional diversifier, and because of this, they tend to exhibit negative short term correlation with stocks. However, the long term picture tells us that future bond total returns will be nothing like what we saw the last 40 years, or the even the last 100 years, or even further since before that, bonds where earning a positive interest on gold pegged currencies.
According to Bernstein in 2014, worthwhile diversifiers from stocks are:
- precious metal miners
- oil companies
Mr Bernstein advises against bonds on the basis that their inflation adjusted returns going forward are too low due to quantitative easing by central banks.
Note that TIPS offer only paper inflation protection. The governement has a strong incentive to publish lower numbers. Many assume that the actual number is 2% or 3% higher, and according to shadow stat, inflation is undermeasured by 4%. When a country has inflation above 15%, the measurement becomes even harder.
Oil has performed well in good times and in the previous inflationary cycle in the 70s. In the 2020 context, we will need insufficient oil production capacity compared to worldwide demand for it to perform well. This is not the case so far, and the pandemic depressed oil demand in the short term. There is no visibility in the medium to long term.
Reits Correlation to Stocks
Due to their high investability, Reits are much more correlated to stockmarket in the short term (2 year time horizon), but their long term (20 year) performance aligns with retal yield and leverage available to large investors.
It is my personal experience that buying physical real estate rather than paper real estate such as Reits results in much lower correlation to stocks. It is also a much safer asset as you control the debt structure and avoid agency issues. Still, this requires one to have sufficient funds to build a diversified position and to have the time to build relationships to oversee its operation.
Reits in the World
The Reits market started in the US but evolved very differently depending on yield and tax in different locations. We suggest taxable investors to look at Reits in their own country and other investors to look at Singapore Reits.
image credit: WikiCommons, London Canary Wharf Cabot Square.
US Reits market
- VNQ with 4% dividend, but this contains hotels etc.
- self storage is a trendy speciality. For instance, PSA priced at 4% dividend too
There is no avoiding 30% WHT if you invest in those and live in a non tax treaty country.
Europe Reits Market
European reits are described here. We see a wide variety of dividend yields spanning for 1.5% to 10%. The various European countries have different level of respect for property rights. Spanish and French commercial property tend to yield more and involve much more confiscation risk.
- Unibail, a leading french retail reit has a 6% dividend, the second, Klepierre, has a 10% dividend. French dividends to undisclosed party are taxed 28%, but 13% to foreign person.
- NSI, a large dutch industrial reit pays 7%
- Deutsche Industrie Reit pays 1.5%
- uk reits have 20% WHT on non resident unless there is a tax treaty. Big Yellow Storage Reits has 3% yield. We give a UK reit table below.
Otherwise, an international list of reits is available here.
- Japan: a list of reits is available here
- 3% to 6% for office reits
- 3% to 5% for residential
- 4% to 7% for diversified
- 3% logisitics
Real estate financing is very expensive in Japan compared to homeowner mortgages, and this has kept rates high.
Hong Kong Reits
- Hong Kong leading reit Link Reits pays 4%
- MTR corporation pays 3%
It appears that returns are very low in mainland China, and the real estate packaged in Reits tends to be low yield trophy real estate. The more lucrative self storage or logistics facilities appear to be listed in Singapore.
- dividend data can be obtained here: dividends.sg
- data centre Kepple DC dividend below 2.5%
- Healthcare Parkway 4% dividend
- Singapore and Australia Aacendas 6.5% dividend
- an interesting outlier: Cromwel Reit invests in European industrial and logistics real estate and its 9% dividend is not taxed
- china logistic reit EC WORLD REIT (BWCU) yields around 10%
|O5RU||AIMS AMP Capital Industrial REIT||Office||Singapore|
|A17U||Ascendas Real Estate Investment Trust||Industrial, Office, Retail||Singapore|
|A68U||Ascott Residence Trust||Hotel||Singapore|
|BMGU||BHG Retail REIT||Retail||Singapore|
|K2LU||Cache Logistics Trust||Industrial||Singapore|
|C61U||CapitaLand Commercial Trust||Office||Singapore|
|C38U||CapitaLand Mall Trust||Retail||Singapore|
|AU8U||CapitaLand Retail China Trust||Retail||Singapore|
|CNNU||Cromwell European Real Estate Investment Trust||Industrial, Office||Singapore|
|BWCU||EC World Real Estate Investment Trust||Industrial, Infrastructure||Singapore|
|AW9U||First Real Estate Investment Trust||Office||Singapore|
|J69U||Frasers Centrepoint Trust||Retail||Singapore|
|ND8U||Frasers Commercial Trust||Office||Singapore|
|BUOU||Frasers Logistics & Industrial Trust||Industrial, Infrastructure||Singapore|
|AJBU||Keppel DC REIT||Data Centers||Singapore|
|CMOU||Keppel-KBS US REIT||Office||Singapore|
|MKLW||A & J Mucklow Group Plc||Industrial, Office, Retail||United Kingdom|
|AEWU||AEW UK REIT Plc||Industrial, Office, Retail||United Kingdom|
|AGR||Assura PLC||Health Care||United Kingdom|
|BYG||Big Yellow Group Plc||Self Storage||United Kingdom|
|BLND||British Land Company Plc||Office, Retail||United Kingdom|
|CAL||Capital & Regional Plc||Retail||United Kingdom|
|CREI||Custodian REIT Plc||Industrial, Office, Retail||United Kingdom|
|DLN||Derwent London Plc||Office||United Kingdom|
|DRIP||Drum Income Plus REIT Plc||Office, Retail||United Kingdom|
|EPIC||Ediston Property Investment Co Plc||Industrial, Office, Retail||United Kingdom|
|FCRE||F&C UK Real Estate Investments Ltd||Diversified||United Kingdom|
|GPRO||Glenstone Property Group Plc||Industrial, Residential, Office, Retail||United Kingdom|
|GPOR||Great Portland Estates Plc||Office, Residential, Retail||United Kingdom|
|GRIO||Ground Rents Income Fund Plc||Residential||United Kingdom|
|HMSO||Hammerson Plc||Retail||United Kingdom|
|HSTN||Hansteen Holdings Plc||Office, Industrial, Retail, Specialty||United Kingdom|
|HCFT||Highcroft Investments Plc||Industrial, Retail, Office, Residential||United Kingdom|
|IHR||Impact Healthcare REIT Plc||Health Care||United Kingdom|
|INTU||Intu Properties Plc||Retail||United Kingdom|
|LMP||Londonmetric Property Plc||Office, Residential, Retail, Specialty, Industrial||United Kingdom|