Analyse: iShares FTSE EPRA/NAREIT Developed Markets Property Yield ETF

REITs tend to provide a consistent dividend yield for their shareholders, making an investment specifically interesting for income seeking investors. As of this writing, the fund’s current dividend yield is 3.05% compared to a trailing 3-year average of 2.95%.

Property ETFs offer investors exposure to a traditionally illiquid asset class that has historically exhibited stock-like returns and bond-like income streams. However, investors should be aware that direct property investments behave quite differently from investments via real estate funds; meaning that funds tend to have high correlations to stock markets and thereby limited diversification benefits for a portfolio. Nevertheless, real estate funds offer a few advantages for investors compared to a direct property investment, e.g. no required mortgage or maintenance are required and improved liquidity versus direct investment.

Fundamentale Analyse

After the tech-bubble burst, central banks lowered interest rates in an effort to stimulate the economy, flooding the market with cheap money. As interest rates normalised, home owners struggled heavily to keep up with their mortgage payments. During the subsequent housing crisis, house prices in the US plummeted, transaction volume dropped dramatically and ultimately construction activity slowed as well. These symptoms ultimately spread globally and beyond residential real estate. Aggregate demand dropped as investors’ risk appetites diminished. While REITs declined during the financial crisis due to the problems in the subprime mortgage market, most REITs had little or no direct involvement with the subprime market.

According to Jones Lang LaSalle, direct commercial real estate investment decreased slightly by 6% q/q in Q3 2012, reaching a total of $100bn globally. Global volume increased by around $100bn each of the last eight quarters, confirming that commercial property is through the recovery phase and has built a base for a positive long-term trend. In the Americas investment had increased by 8% y/y through the end of the third quarter, reaching $44bn. Canada and Mexico drove the growth as they expanded 17% and 335% y/y, respectively. Despite the fact that global direct commercial real estate volume has decreased 7% y/y, Jones Lang LaSalle remains confident in their full year forecast of $400bn; on a year-to-date basis global transactions stand around $295bn.

Volume in the Asia Pacific region dropped by 13% in the third quarter compared to Q2 2012 as China (-57%) led the way. For the full-year 2012, Jones Lang LaSalle expects volume to be down by 10% compared to 2011.

In the US, investment volumes dropped by 3% q/q in Q3 2012 but have increased 4% year-on-year, reaching $37.3bn through the end of Q3. Growth has slowed due as transaction periods have lengthened in light of the global slowdown.

In Q3 2012, activity in Hong Kong increased by 5% as individual investors continue to focus on strata-titled assets, shifting away from the residential sector. Strata title property is a form of ownership where the individual owns a unit and a share of the common property. Residential, commercial, industrial and other types of buildings can be subdivided into different strata plans.

Australia, the third largest country exposure within this ETF’s benchmark of reference, continues to be a large investment market in the Asia Pacific region. Total investment activity in Australia has been mainly driven by domestic investor’s demand looking for opportunities in prime locations. Direct commercial real estate investment increased by 17% y/y in Q3 2012.

Going forward, it will be difficult for REITs to mirror their pre-crisis performance. During the last decade, REITs mainly benefited from increasing leverage, lower borrowing rates, rising property values, and strong growth in demand for properties. For now, the latest interest rate developments are supportive of real estate markets as many central banks around the globe continue to keep rates at historical lows. However, rates will eventually rise again which will increase REITs' cost of capital, pressure asset values, and reduce cash flow.

Indexkonstruktion

The FTSE EPRA/NAREIT Developed Dividend+ Index offers exposure to listed real estate companies and Real Estate Investment Trusts (REITs) from developed countries worldwide, excluding Greece. The index is a free-float market capitalisation weighted index. Eligible securities must have a one-year forecast dividend yield of at least 2%. Constituents must pass a series of liquidity tests and the index is reviewed quarterly. Component stocks have to pass all criteria on two consecutive quarterly reviews before they are included in the index. As of writing, the index is heavily biased towards the US (48%), followed by Hong Kong (14%) and Australia (10%). The biggest single issuer exposure is Simon Property Group (5%).

Fondskonstruction

The iShares FTSE EPRA/NAREIT Developed Markets Property Yield Fund uses physical sampling replication to track its reference index. The ETF invests in all constituents of the FTSE EPRA/NAREIT Developed Dividend+ Index.
iShares engage in securities lending with this ETF to generate additional revenues. During the 12-months trailing the 30th of August 2012, the ETF had on average 0.22% of its shares on loan and generated 0.01% in revenue for the fund. However, this ETF only started sec lending this year. Lending revenue generated can partially offset the TER as it is split 60/40 between the fund and BlackRock, whereby BlackRock covers the costs involved. To protect the fund from the counterparty risk that results from this practice, iShares takes collateral greater than the loan value. Collateral levels vary from 102.5% to 112%, depending on the assets provided by the borrower as collateral.

Cash received as dividends from the underlying stocks is held in the fund’s income account until it is distributed to fund holders. Distributions are made on a quarterly basis. This dividend treatment can potentially create a drag on returns in upward trending markets as dividends are not immediately reinvested into the fund. In practice this cuts both ways. It could also result in outperformance if the benchmark falls in this interim period.

The fund may hold up to 20% of its NAV in securities from a single issuer in order to achieve its objectives. Under exceptional market conditions, the fund manager may invest up to 35% of the fund’s net assets in securities from a single issuer. Moreover, the fund may invest in convertibles, gilts, liquidity instruments, other transferable securities and open-ended collective investments to track the reference index.

When direct investment in a component stock is not possible, the fund may, in very limited circumstances, invest in depository receipts to gain exposure to the reference index. In addition, the fund may also invest in foreign direct investments (FDIs) for direct investment purposes to achieve its objectives.

Gebühren

The fund levies a total expense ratio (TER) of 0.59%. This lies at the upper end of the range for ETFs tracking developed property markets. Other potential costs associated with holding this fund which are not included in the TER include rebalancing costs, bid-ask spreads and brokerage fees.

Alternativen

As of writing, there are five other ETFs providing exposure to the global property market. The db x-trackers FTSE EPRA/NAREIT was launched in January 2011, the Think Global Real Estate Tracker was launched in April 2011 and the HSBC FTSE EPRA/NAREIT Developed ETF was launched in June 2011; hence all three are still lagging in terms of liquidity, size and track record. The SDPR Dow Jones Global Real Estate was launched only in October. The Lyxor ETF FTSE EPRA/NAREIT Global Developed tracks an index with similar exposure to the US (45%) and slightly greater exposure to Hong Kong (10%) followed by Japan (10%). The Lyxor ETF uses synthetic replication and levies a TER of 0.45%.