Buying Europe with Spanish and Irish REITs

With cash and bonds yielding next to nothing and stocks looking pricey, investors have developed a newfound appreciation for one of the oldest asset classes of all: real estate.

As a case in point, the SPDR Dow Jones International Real Estate ETF (RWX)—a good proxy for international REITs and land companies—brought in $304 million in new assets last month.  Property is hot.

Today, we’re going to take a look at some of the more promising new international REIT options.  But first, let’s tackle a broader question: Why invest in REITs at all?

Property has been a preferred investment vehicle for the world’s wealthy for millennia, and it a particularly popular asset class among today’s high-net-worth investors.  Structured right, real estate is an income-producing investment with a strong built-in inflation hedge and favorable tax treatment. But realistically, individual investors cannot buy large commercial properties, which can cost tens of millions of dollars or more. REITs allow ordinary investors to get a diversified piece of the asset class.

REITs have been popular for decades. But up until relatively recently international REITs were rare. The unique tax characteristics that make REITs so appealing—such as their ability to avoid the double taxation of dividends—were available only in the United States.  That has changed in recent years, with several countries across Europe and Asia adopting the REIT structure. We’ll look at some of the newer entrants today in Spain and Ireland.

Spanish REITs

Let’s start with Spanish REITs, or more precisely Sociedades Anónimas Cotizadas de Inversión en el Mercado Inmobiliario (“SOCIMI”). SOCIMIs avoid corporate income tax if they invest in real property, distribute at least 80% of their total income (including rental income) as dividends, and distribute at least 50% of the capital gains from any property sales as dividends.

Spain was a ripe market for the REIT structure.  After an epic property bubble and bust, Spain was awash in high-quality properties that banks and developers were eager to unload and foreign investors were eager to buy.  The new Spanish SOCIMIs provided the vehicle to make it possible.

The first Spanish REITs hit the market in March of this year with the initial public offerings of Lar España (Spain:LAR, OTC:LAREF) and Hispania (Spain:HIS, OTC:HPVBF), and both had their fans among large, institutional investors. Bill Gross’ PIMCO is a major investor in Lar España, and funds run by John Paulson and George Soros invest heavily in Hispania. Moore Capital Management and Cohen & Steers are major investors as well.

Lar’s portfolio is focused primarily on shopping centers, retail parks, and offices, with a smaller concentration (up to 20%) in residential properties.  Hispania is far less retail-focused.  Instead, its portfolio is concentrated in office properties in Madrid and Barcelona, 4- and 5-star hotels across Spain, and residential properties.

Neither Lar nor Hispania pay a dividend yet, but I expect both to begin paying by early summer of next year.

Since going public at €10.00 per share in March, Lar is down about 8% and Hispania is up about 3%.

Irish REITs

Spain is not, of course, the only European country to have an epic property boom and bust.  Tiny Ireland had one of the biggest property bubbles in history, and its collapse brought a sad end to Ireland’s days as a “Celtic tiger.” But after falling for seven years, Irish property prices turned up last year, and Irish commercial properties are enjoying a quiet boom.

Ireland introduced the REIT structure in 2013, and the first two IPOs to hit the Dublin exchange were the Green REIT (Dublin:GRN, OTC:GREEF) and Hibernia REIT (London:HBRN, OTC:HIBRF).

Green REIT invests mostly in Dublin office buildings, while Hibernia invests in a diversified mix of offices, industrial properties, and retail stores primarily in Dublin. Per its most recent filings, Green expects to declare and pay a dividend of 0.92 cent per share, which would work out to a modest yield of 0.7%. Hibernia does not yet pay a dividend, though it is expected to initiate one next year.

Year to date, Hibernia are both flat.

So, are Spanish or Irish REITs a buy?

Yes.  If you believe, as I do, that the European Central Bank is about to open the floodgates to almost unlimited amounts of central bank liquidity, then having a position in high-quality properties in two of the hardest-hit markets makes sense.

American REIT investors are accustomed to viewing REITs as income investments, so the fact that these new entrants currently do not pay dividends might raise red flags.  Just remember, these REITs are all very new and still building out their portfolios.  All are required by law to pay out the vast majority of their profits as dividends; it just so happens that at this early stage, the profits have yet to materialize.

Related posts:

International REITs: Look to Asia for Yield

International REITs: 3 British Buys

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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