By The Sizemore Letter
REITs have become a portfolio staple for income investors over the past decade and rightfully so. There are few investable options that offer the same potential for a high and rising cash payout, a built-in inflation hedge, and diversified exposure to an asset class—commercial real estate—that would otherwise be off limits to most individual investors.
I’m a big believer in REITs, and I own a couple—such as Realty Income (O) and National Retail Properties (NNN) that I hope to never sell. I plan on using their income streams to pay my bills in retirement…and if my kids are smart, they will hold on to the shares long after I’m gone. There is no such thing as a “risk free” investment, but a high-quality, cash-flowing property portfolio is the closest thing I’ve found.
The REIT structure was invented in the United States, and the vast majority of all traded REITs are American. But the idea has caught on overseas as well, particularly in the UK and parts of Asia.
Should you consider international REITs in a diversified income portfolio?
Absolutely. Today, we’re going to take a look at some of the investable options starting with the UK.
But first, I have a confession: I religiously watch Downton Abbey. It’s a hobby I generally keep in the closet (I live in Texas…what would the neighbors say), but I consider it one of the best-produced series of the past decade. The series shows the evolution of the aristocratic Crawley family and how they adapt to a changing world. Their traditional lifestyle is turned upside down by the rise of the new middle class and by the rise of modern industrial farming.
The characters in the show are purely fictional. But have you ever wondered what happened to the real-life equivalents the Earl and Countess of Grantham?
The successful ones turned their landed estates into diversified property empires. With a fortune estimated at $18 billion, Gerald Grosvenor—the Duke of Westminster—is the wealthiest person in Britain via his interests in the Grosvenor Group, a property corporation with offices in 18 cities worldwide that happens to sit on some of the most valuable land in the West End of London.
He should have taken investment advice from the Duke of Westminster.
Unfortunately, you can’t invest with the Duke unless you are a high-net worth individual or a large institutional investor. But there are plenty of publicly-traded British REITs to choose from.
I’ll start with the largest, Land Securities (UK:LAND, OTC:$LSGOF). Land Securities—which holds a mix of office, retail, and residential properties—is heavily weighted in London, which has been a major boost for the portfolio. Even while the rest of the country has seen property values languish over the past five years, prices in London’s posh neighborhoods—which are at new all-time highs—make it look like 2006 all over again. London property has been a favored haven for the world’s wealthy, and particularly the wealthy from Russia and the Arab world. (On a side note, Land Securities also owns the iconic neon billboards in Piccadilly Circus.)
Land Securities is reasonably cheap, trading at about a 5% discount to book value. But this is only cheap if you consider the underlying property itself to be reasonably priced. The stock yields 3.35% in dividends, which is a little on the skimpy side for a REIT. And the company cut the dividend during the pits of the 2008-2009 financial crisis, which is a cardinal sin for an income investment.
So, Land Securities is essentially a bet on London property prices and on the success of new developments, making far more of a growth investment than a pure income investment.
Next on the list is British Land (UK:BLND, OTC: $BTLCY), which is also heavily weighted in London. British Land’s portfolio is more heavily weighted in retail properties, which account for about half of its holdings.
At 4.7%, British Land sports a more attractive dividend yield, though the company’s payout has actually shrunk a little from its pre-crisis levels. It also trades at a slight discount to book value (a little less than 3%).
For a more diversified choice, take a look at Hammerson PLC (OTC: $HMSNF, UK:HMSO). Hammerson is a diversified retail REIT with properties scattered across the UK. It also owns a fair number of properties in Germany, Spain, and France.
Having less exposure to London, Hammerson has benefitted less from the boom in that market. But as Europe’s capital markets return to “normal,” Hammerson may have the best upside from this point on.
Hammerson trades at an 11% discount to book value and yields a modest 3.74% in dividends. Like the other REITs covered, Hammerson hit a rough patch during the financial crisis and was forced to issue new stock and reduce its dividend per share, though the dividend has been steadily rising since 2010.
Before you run out and buy British REITs, there are a couple points to consider:
- The REIT structure is still relatively new to the UK, having been introduced in 2007. Most British REITs were originally property development companies rather than semi-passive landlords. As such, they tend to be more growth-focused than purely income focused. The U.S. REIT market has its share of growth-and-development-oriented REITs as well—think Vornado (VNO)—but the sector as a whole is more oriented towards current income.
- Many British REITs trade in the U.S. as ADRs, but I do NOT recommend buying them. Even though each of the REITs mentioned is a multi-billion-dollar enterprise, the trading volumes on the ADRs is almost nil. You’re much better off buying the London-listed shares. These days, it’s not particularly hard to trade on foreign markets. Depending on who you use for brokerage, you may need to call the order in via phone rather than using the standard website interface. And if you have any questions, that is exactly what I suggest you do. If you are new to international markets, I recommend you call your broker and have them walk you through the process.
British REITs are not the only non-U.S. option. In Part II, we’ll take a look at options in Asia.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he was long NNN and O. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”
This article first appeared on Sizemore Insights as Investing in British REITs
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