Having completed another satisfying, successful year as a U.S.-based REIT analyst, I found myself again curious and wanting a closer look at REITs in the European continent – which is geographically slightly larger than the U.S., but sports a population over 2.25x the U.S. – around 743 million people.
2018 was a rollercoaster for U.S. stocks and REIT investors. Starting in January, REITs experienced a drastic selloff with share prices dropping on average more than 10%, followed by a strong recovery and a crash again towards the end of summer. And I don’t have to revisit the late-year performance to make the point. You can see the turbulence by checking the performance of the Vanguard Real Estate ETF (VNQ), which invests in issued REIT stocks, and tracks the MSCI U.S. Investable Market Real Estate 25/50 Index.
With interest rates back on the rise, investors became increasingly worried about REITs, which are often perceived as interest rate sensitive vehicles. This perception (actually false), still caused the volatility to increase as investors ran for the exits, in anticipation of further interest rate increases coming in 2019.
It’s this very kind of irrational market behavior that reminds me of the importance of diversification. You can’t afford to put all your eggs in one basket – and with volatility expected to continue, I’m increasingly looking past our own shores, for added diversification.
In preparation of a future investment in Europe, I reached out to my friend Jussi Askola, president of Leonberg Capital, to discuss individual opportunities in the European REIT market. Jussi has real estate experience in several countries, including France, Germany, the U.K., and the Baltics. He’s a local expert in REIT investing, and we talked about why U.S. investors should consider European REITs as part of their portfolio. Here are excerpts from the five questions I asked – in our November conversation…
Brad Thomas: Why should U.S. REIT investors consider investing in European REITs, going into 2019?
Jussi Askola: The saying “location, location, location” is often quoted as the three most important virtues of real estate investing. When it comes to REITs, I find that “diversification, diversification, diversification” is a more accurate representation of what it takes to achieve investment success. Every real estate market ticks differently, and by investing in European REITs, U.S. investors can target valuable diversification benefits. Today, there is a clear trend towards higher interest rates in the U.S. This is much less certain in Europe where interest rates remain exceptionally low, and spreads are particularly attractive. This may cause U.S. REITs to perform differently from European ones, and you want to own some of both to reduce the overall volatility of your portfolio.
Moreover, in addition to the diversification benefits, many European REIT sectors are exceptionally cheap with historically high discounts to net asset value (NAV) heading into 2019.