I ran across an article today on real estate investment trust (REIT) ETFs at Experiments in Finance. Ricemut, the author, had done a good job exploring various REIT indices and electronically traded funds (ETFs) based on those indices. She is considering increasing her portfolio diversity by adding a REIT ETF.
I currently own a REIT, Hospitality Properties Trust (HPT), that I purchased before I started this blog. HPT was going to be announcing their earnings today, so I was thinking a lot about REITs when I ran across the Experiments in Finance article. As a value investor, something in that article caught my attention as a potential concern, so I decided to leave a comment. Here’s what I wrote:
I’m glad to hear that you are considering adding some REITs to your portfolio. I added HPT to my portfolio a few months after 9/11 (yielding over 11 percent at the time) and I have loved it since.
However, REITs are getting pretty pricey now that everyone else is discovering them. I highly recommend that you read Ralph Block’s post at the Motley Fool at http://www.fool.com/community/pod/2006/061017.htm. Ralph wrote the book on REIT investing and is a real expert on the subject.
I would avoid buying a REIT index at this time and instead focus on identifying opportunities in the REIT sector that provide a margin of safety. International REITs may be the way to go right now if you really want to add REITs to portfolio in the near future. In addition, buying individual REITs helps reduce your costs buy avoiding the slightly higher fees associated with REIT index funds. I would also focus on identifying REITs that control important, hard to substitute pieces of property. Even REITs can have wide moats.
After I left this comment, I realized I really need to research REITs again soon and scope out the market for stocks with international real estate investments. After a quick search, the NAREIT International Forum looks like a good place to start learning about international opportunities. NAREIT also has an interactive REITs Around the World guide. If you have been researching international REITs or other international real estate stocks, please share some of your thoughts in the comments section below.