The American housing and real estate market has seen a catastrophic year, with investors and prospective home buyers experiencing major headwinds as home prices – already at an all-time high – soar, often jumping by double digits.
Broader economic conditions have left many investors and potential buyers out in the cold with inflation hitting a four-decade high, and interest rates aggressively climbing.
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As part of its arsenal, the Federal Reserve has been actively raising its prime interest rates, the latest of which was 0.75% at the end of July as it looks to take the benchmark rate between 2.25% - 2.5%.
The cost of owning a home has also become out of reach, even for the most financially sound buyers and investors. Since January, mortgage rates have already climbed by more than two percentage points, jumping from 3.22% to 5.81% by June.
The high level of uncertainty has left many buyers and investors to put their search for a potential property on hold, for now at least.
Albeit the negative macroeconomic conditions, it’s starting to look as if the market has slightly cooled in recent months.
The high cost of borrowing has brought down applications to their lowest in more than two decades. Moreover, existing home sales have also somewhat subsided, trending below 2019 levels.
The changing economic cycle has left buyers and investors looking for alternative ways in which they can recession-proof their investments and mitigate the possibility of experiencing a major loss in the event of a sudden economic turndown.
For some potential buyers and investors, the possibility of owning some form of real estate is now lying in Real Estate Investment Trusts (REITs) especially as the market is sailing through choppy conditions.
Moreover, a handful of buyers and investors are also considering the possibility of international REITs, as a stronger dollar has allowed them the upper hand in the foreign real estate investment market.
Though there’s a mixed consensus regarding REITs, the outlook is perhaps stronger and more fruitful than placing their investments in the bearish stock market.
The burgeoning pressure has managed to push down on even the most seasoned buyers and investors. Costly borrowing, skyrocketing inflation, and a high level of uncertainty are forcing many in a completely alternative direction.
Slowing economic conditions, at least in the U.S. are making international real estate investments increasingly attractive,, this is perhaps a foreign concept that not many have considered, though the opportunities are available, especially for international REITs.
Depending on who you may ask, the U.S real estate market is starting to show signs of cooling, but the higher rates have left many first-time buyers hawkish. In some parts of the country, residential real estate has slowed, while commercial real estate has shot up in some states.
In America, some states with high-end zip codes may soon see a softening in the market to attract potential buyers, but this would require buyers and investors to be patient before making a drastic decision.
In a recent move, regional housing markets have been slashing home prices, with some listings taking a 34% cut in July, well above the 25.7% in May according to data by Redfin.
Lucrative neighborhoods in major metropolitan cities, from San Francisco on the west coast, to areas such as Camden, Newark, and New York in the northeast have been cutting back on housing prices to attract investors as they navigate a housing recession.
Local and foreign buyers have now seen entering the market at various stages, to take advantage of the current conditions.
In terms of localized efforts to boost the state economy, different states have been making adjustments to draw in more investment not just for the retail sector, but for innovation as well.
Among economic indicators, some states are trailing include uplifting the quality of life through building better state-funded programs, and helping citizens with much-needed tax breaks amid soaring inflation.
Tourism has also seen a major influx of economic activity throughout the summer months for many popular states with major connecting airports. In New Jersey, flights from Jersey to Europe, and inbound connections saw the Newark Liberty International Airport passenger count jump by 53% in June 2022.
Other airports including Hartsfield-Jackson Atlanta International Airport, Fort Worth International Airport, Denver International Airport, Chicago O’Hare International Airport, and Los Angeles International Airport made up the top 5 busiest airports in the world, as both domestic and international leisure travel was up from pre-pandemic figures.
The case here shows that economic activity has been going up in some sectors, but when it comes to local real estate, some states are lagging far behind their counterparts.
Despite current conditions, many Americans are feeling a bit more positive about looking to Europe and abroad to purchase real estate as the stronger dollar-euro exchange rate helps them snap into affordable housing.
Even if you don’t feel like going through all the trouble of moving abroad, or having to deal with foreign real estate laws, you can always look to invest your cash in some lucrative foreign REITs that still invest a majority stake outside of the American real estate market.
5 International REITs worth considering
While a majority of real estate investment trusts frequently invest in American properties, these REIT options are oftentimes used as a point of entry for foreign and international real estate as well.
Just as with the domestic market, there is still a lot that buyers and investors need to consider when choosing a REIT option.
For starters, international REITs typically concentrate on countries that already have a thriving real estate market. Then there’s the current economic and political climate that plays a major role in the performance of international REITs, regardless of where in the world they may be buying up properties.
For better portfolio growth and stability, here are our five picks for international REITs buyers and investors should consider in the near term.
iShares (NASDAQ:IFGL) has been a popular and affordable purchase REIT option for many, as month over month performance has been steady, jumping by 2.86% between July and August.
While year-to-date (YTD) performance has been down 17.91%, this investment tracks investment results of the FTSE EPRA/NAREIT Developed Index.
The majority of the investment is made up of real estate equities that are developed in non-American markets.
Unlike other well-known REITs, iShares measures underlying stock markets in developed countries, and typically engage with companies that own and develop real estate in foreign markets.
Second, to Schwab U.S. REIT ETF (NYSEARCA: SCHH), iShares has one of the lowest expense ratios, currently at 0.08%, whereas SCHH sits at 0.07%,
WisdomTree Global Ex-U.S. Real Estate ETF
WisdomTree (NYSEARCA:DRW) has undergone major changes in recent months. In the past, the fund focussed on tracking dividend-centered indices of international real estate companies.
Now since April 2022, the fund is focussing on companies that derive revenue from tech real estate operations.
The makeover means that DRW works with megatrends that are globally recognized including cloud computing, internet connectivity such as 4G and 5G, logistics, and life sciences.
Considering its change of direction, the fund is even now more attractive than before in terms of foreign real estate investment. DRW currently yields at 5.83%, while YTD performance has come down 5.87%, the fund is considered a remarkable purchase for long-term investors who are willing to hold for five years or longer, after which return on investment starts to substantially increase.n
Vanguard Global ex-US Real Est ETF
While Vanguard (NASDAQ:VNQI) takes a completely different approach, seasoned investors find more comfortable investing in a company that tracks the performance of the S&P Global ex-U.S. Property Index.
Somewhat traditional than what you’d expect from American REIT funds, Vanguard allows for more transparent and reliable access to the international REIT market.
The fund follows a float-adjusted, market capitalization-weighted adjusted index, making it easier to track and measure the basic equity market performance of international real estate stocks.
Moreover, instead of only measuring indexes in developed economies, Vanguard follows trends in emerging markets for both REITs and specific real estate management and development companies (REMDs).
The other positive news about VNQI is that it holds around 99.17% foreign holdings, and has return equity of 8.3%. Throughout the first couple of years, performance is slower, and the initial return will most likely start after three to five years depending on the macroeconomic conditions.
Dow Jones International Real Estate ETF
Focused on tracking and measuring Select Real Estate Securities, the Dow Jones International Real Estate ETF (NYSEARCA:RWX) is a float-adjusted market capitalization index performance in conjunction with traded real estate equities in foreign markets outside of the U.S.
Overall sentiment has been slightly more bullish in recent months as the sudden market turnaround helped major indices shed most of their bearish performance.
Currently, YTD is down, but an upward trajectory has many experts suggesting that RWX could possibly rebound in the coming months as market conditions improve. RWX holds a steady yield of 5.49% and has a considerably low expense ratio of 0.59%.
Moreover, in the last month, RWX has climbed by 5.59%, a steady performance as many buyers and investors are looking to start regaining interest in the international real estate market.
Managed by Northern Trust, FlexShares corresponds with the price and yield performance of the Northern Trust Global Quality Real Estate IndexSM.
The investment works alongside the performance of equities that receive major global exposure that hold well-known quality, value, and momentum.
FlexShares Global Quality Real Estate Index Fund (NYSEARCA:GQRE) holds a one-year yield at 2.71%, and has a forward-looking price of $62.54 per share, slightly below its 52-week high of $74.34 and above its 52-week low of $54.88, according to recent company insights.
There’s been strong recognition for FlexShares, mainly as it focuses on delivering results that are not commonly found with international REITs.
Seeing as it tracks the performance of an underlying index, FlexShares is considerably more sustainable for long-term investment and portfolio growth.
Final Thoughts
While market conditions are set to improve in the coming months, potential buyers and investors who are interested in real estate investment trusts will need to consider macroeconomic trends that are affecting the broader global performance of the real estate market.
Even as the changing economic cycle has made it increasingly difficult to establish a strategy that will last for the near term, it’s considered more feasible to hold onto current investments, especially REITs as the market cool-off is set to deliver sizable returns in the long term.
