The Benefits of International REITs to US REITs

The US REIT market is the most mature and largest market in the world so many US investors see no reason to invest overseas. Previous research however finds that including assets from international markets offer substantial benefits to a domestic portfolio. Therefore, we examine whether international REIT can significantly increase the performance of the M2 version of the Sharpe ratio of US REITs for two reasons. First, the benefits are stated in returns, which makes easier for investors to understand. Second, Liang and McIntosh (1999) show that the overall benefit can decomposed into a diversification benefit and a return benefit, so we can identify the sources of and increase in Sharpe performance. Using daily data on 12 international REIT markets from 2/01/1990 to 31/12/2024 we make a number of conclusions. First, over the whole sample period international REITs would have significantly increased the M2 of US REITs by 3% per annum, on average, composed of a significantly positive diversification benefit (8%) reduced by a significantly negative return benefit (-5%). Second, we find that such benefits are time varying and have declined since the end of the Global Financial Crisis (GFC). Lastly, we find that international REITs would have significantly decreased the M2 performance of US REITs in the Sub-prime/GFC crisis of 2007-2009, and the Inflationary interest rate hike of 2022, but would have offered a significant increase to US REITs M2 performance in the COVID meltdown of 2020. This suggest that including international REITs in a US REIT portfolio needs careful consideration.