One issue that many of us grapple with is a concentration of our exposure in our RRSP portfolios. Typically, we tend to have home country bias when forming our portfolios. While this is totally understandable, it’s worthwhile to spend some of our time researching other parts of the world for better diversification.
Dream Global REIT (TSX:DRG.UN) is a great way to geographically diversify your portfolio. As an owner-operator of a high-quality portfolio of mostly office and industrial properties in Western Europe, Dream Global REIT offers investors a 4.8% yield, a strong balance sheet, and growing funds from operations.
Exposure to Western Europe
Dream Global’s properties are located primarily in Germany (72%) and the Netherlands (21%), countries with strong operating fundamentals that are quite independent of North American fundamentals, thereby offering diversification.
Germany’s unemployment rate is currently at a low of 3%, and with a limited supply of office space coupled with strong demand, they are seeing office vacancy of a mere 3.3% currently. This, of course, is driving rent increases.
The average office rental pricing growth in the second quarter of 2019 was well over 5%, as vacancy rates remained low.
In the Netherlands, Dream Global has exposed itself to the sixth-largest economy in the European Union and a culture that emphasizes entrepreneurship and innovation. It’s an open culture that has seen strong economic growth over the last few years.
With economic growth moderating worldwide, but still close to 1% (0.7% growth) in Germany and expected at 1.5% in the Netherlands, we can at least say that the favourable supply dynamics in Germany and the Netherlands will support rents for the foreseeable future.
Solid financial backing
In addition to Dream Global REIT’s exposure to a strong, diversified European market, the REIT also has a strong financial position to take it into the future and to give us security and comfort.
The REIT’s debt to total capital ratio currently stands at 45%, and with distributions that are well-covered (a payout ratio of below 80%), we can feel secure turning to this REIT for diversification.
Liquidity in the second quarter of 2019 improved once again and now stands at $567 million. This improvement came from cash ($351 million) and from undrawn credit facilities ($216 million).
The REIT’s target markets for further investments and acquisitions include the big seven markets in Germany, such as Berlin, Munich, and Frankfurt, the top markets in the Netherlands, and other secondary markets that offer compelling risk-adjusted returns.
Foolish bottom line
Dream Global REIT represents an attractive opportunity for RRSP investors to start diversifying their portfolio away from Canada and North America, and to gain exposure to a different geographic area that’s strong, safe, and currently experiencing solid trends in their economies.
Diversification can give your portfolio a buffer to Canadian and U.S. weakness and can provide you with returns that are uncorrelated to the returns achieved here.
With a 4.8% yield that’s backed by a strong fundamentals, a high-quality portfolio of properties, and a healthy payout ratio, investors have access to a diversifying set of cash flows as well as a relatively safe income stream.
