Real estate still has its issues. The pace of the economic recovery and job creation will be a huge factor in the coming months and years.
Building a REIT ETF
Cohen & Steers carefully analyzes the REITs that are included in their index, stating that it’s more important than ever to identify the companies that have the best position in their ownership of real estate, as well as their management track record and position in the marketplace.
“When you look at ETFs, most are indexed to a certain benchmark and you get 200-plus securities that may or may not exhibit those outstanding characteristics,” Ialeggio says.
What Cohen & Steers aims to do is identify the top 75 global real estate companies that will benefit from the economic recovery and lead the real estate market forward.
Some of the qualities they look for in such companies are their ability to tap equity markets to take advantage of distressed opportunities. “The market leaders are able to act more quickly to take advantage of opportunities,” says Ialeggio.
Cohen & Steers isn’t just researching international REITs from a computer in New York, either. “When we evaluate real estate companies to invest in, we’re actually going to these places,” says Ialeggio.
Analysts go into the buildings, look at cash flows and evaluate the economic climate of the area. Because economic growth around the world is happening at different rates, Ialeggio says the approach is especially timely.
“It’s not a one-size-fits-all approach that will win going forward,” he says. “We’re trying to tailor our strategy for a market that’s growing.”
REITs and Dividends
REITs are required to distribute 90% of their taxable income to investors in order to have REIT status, which is one of the reasons they’re so appealing to investors.
Overseas, the same basic idea holds, though the tax rules may differ slightly. The requirement to pay out such income overseas can range from 70%-90%, says Ted Valenti, senior product manager at Cohen & Steers.
Payout ratios are another front on which REITs are improving. At the height of the financial crisis, says Ialeggio, ratios were the lowest they had ever been. These days, they’re coming back to where they have historically been.
Ialeggio says that Cohen & Steers’ forecast for the next decade is approaching 10% dividend growth per year.
“The dividend growth has always been a big part of the total return story that makes REITs attractive.”
Other global real estate funds include SPDR DJ Wilshire Global Real Estate (NYSEArca: RWO) and First Trust EPRA/NAREIT Global Real Estate Fund (NYSEArca: FFR). For investors seeking non-U.S. exposure, international real estate funds include SPDR Dow Jones International Real Estate (NYSEArca: RWX) and WisdomTree International Real Estate (NYSEArca: DRW).
All five funds share similar characteristics, though GRI’s 75 holdings is more selective compared to the others, which include between 119 and 263 holdings.