Co-Produced by David Ksir - our European analyst who covers European REIT investment opportunities for us
The U.S. has always been known for its advanced public markets, providing vast liquidity and a wide range of investment opportunities. When it comes to REITs, the United States has a long history, with well-regulated and well-managed companies. After the Great Financial Crisis, most publicly traded U.S. REITs have reduced their leverage, making them among the safest and best-positioned in the world.
That is why 75% of our portfolio is invested in U.S. REITs (VNQ).
However, we also recognize the benefits of diversifying our investments by venturing into international markets. International REITs can offer unique opportunities, albeit with different dynamics and increased risk. Investing abroad requires a deep understanding of local markets to make informed decisions. It can be a risky endeavor, but when done right, it can yield better risk-adjusted returns and increased portfolio diversification.
Jussi and I, being Europeans, have an advantage in understanding the local market. We believe we can separate the best opportunities from the rest in Europe.
Today, I want to share with you my top three European REIT picks.
Vonovia (OTCPK:VONOY)
Vonovia may not be classified as a REIT, but its operations closely resemble one. As a major apartment landlord, Vonovia owns around 500,000 units primarily in Germany, with a presence in Sweden and Austria as well.
The stock experienced a significant sell-off in 2022 due to rising interest rates and uncertainty about the company's ability to repay its debt. However, I believe there are three compelling reasons why Vonovia is an excellent investment opportunity.
First, the current market cap reflects a significant discount to the value of Vonovia's apartment portfolio. At the current price, investors are essentially buying a stake in the portfolio at a price per square meter well below its reported value, replacement costs, and comparable property prices. This presents an opportunity to buy the portfolio at a deep discount to its fair value.
Second, Vonovia has addressed most of the near-term debt maturities through successful refinancing and disposal proceeds. The company has enough cash on hand to cover all debt maturities until early 2025, providing a buffer for potential interest rate drops or asset sales to generate liquidity.
Third, the German housing market is expected to experience an under-supply of housing in the coming years. With positive net immigration and rising construction costs, property values are likely to remain high, benefiting Vonovia.
In summary, investing in Vonovia allows you to have a stake in a defensive portfolio at a significant discount to its net asset value. As the net asset value grows over time, you can also earn an 8.5% cash flow yield.
Klépierre (OTCPK:KLPEF)
Klépierre is the second-largest mall owner in Europe, with over 70 high-quality shopping malls located in major cities across France, Italy, Spain, and Scandinavia.
While Klépierre shares similarities with the U.S.-based Simon Property Group (SPG), there are key differences to consider. One significant difference is the supply of malls in Europe, which is significantly lower compared to the United States. This results in lower competition and higher revenue per square foot for Klépierre.
Moreover, Klépierre's malls benefit from the unique shopping culture in Europe. Beyond shopping, malls in Europe offer a wide range of experiences, from dining and entertainment to fitness and wellness services. This experiential factor makes European malls more resilient to e-commerce and provides more stable revenues.
Klépierre's tenant roster is dominated by grocery stores, which contribute significantly to footfall and provide safe cash flow regardless of the economic cycle.
Despite the challenges posed by the pandemic, Klépierre has recorded positive rent spreads and increased net current income. The REIT pays a 7% dividend yield and trades at an attractive valuation compared to its fair value.
Branicks (BRNK / OTCPK:DDCCF)
Branicks is a riskier investment compared to the previous two picks. It operates two separate business lines: a commercial real estate portfolio and an asset management business.
The company's commercial portfolio, dominated by logistics and office properties, has performed well, boasting high occupancy rates and steady rent revenue growth. The asset management business has also been resilient, although transaction volumes have been low.
However, the stock has faced significant sell-off due to concerns about debt maturities. While the liquidity situation remains uncertain, Branicks has taken steps to raise capital through asset sales. The outcome is uncertain, and there is a real risk of bankruptcy.
Investing in Branicks is akin to a lottery ticket, with an asymmetrical risk-to-reward profile. If the company manages to secure the liquidity it needs, the share price could skyrocket. On the other hand, there is a possibility of losing the entire investment.
For large investors, Branicks' bonds provide a safer position in the capital stack and the potential for appreciation. These bonds can be purchased on the Frankfurt stock exchange.
Bottom Line
Investing in international REITs can enhance portfolio diversification and provide access to higher potential returns in less covered markets. However, it is crucial to have the right information and understanding of local market dynamics to mitigate risks.
Today, I have highlighted three out of the several international REITs in our portfolio. Please note that some of these securities may not trade on major U.S. exchanges and carry their own set of risks.