As the property sector experiences the initial stages of recovery, investors are seeking liquidity in this market via ETFs, as Victoria Hartley reports
The recovery from the global property slump is still on the junior slopes across the world. Yet some ETF providers believe the downturn provided a harsh, salutary lesson to investors trapped in illiquid funds when the property bubble burst.
According to the iShares August property report, real estate funds often could not be liquidated, while many have lock-up periods preventing investors from selling their fund units. It said: “As the first signs of an end to the crisis emerge, investors are looking into alternative ways of investing in real estate. This has drawn more attention to real estate investment trusts (REITs).” REITs typically invest in commercial real estate, such as warehouses and apartments, via properties or mortgages. One way investors can tap this sector is through ETFs tracking indices comprising REITs.
The European, US, Canadian and China property ETFs have led the way back, according to Morningstar performance figures. The leveraged US property-tracking Ultra Real Estate ProShares fund, which benchmarks 75 mainly commercial real estate companies, took the top spot over three and six months with total returns of 78.48% and 123.64%. However, the same fund is also languishing at the bottom of the table over one year.
Steve Cohen, managing director of ProFunds Group says: “For our Ultra Funds, we measure ourselves on how closely we achieve two times the benchmark on a daily basis. If the benchmark is up 1%, we should be up about 2% that day and that’s what the people who use our funds expect.”
He says the index of commercial real estate companies has been trending for over six months, which has resulted in the performance of the leveraged fund being greater than twice the index return. He adds: “We seek 200% exposure to that index and each day we try to achieve results which are twice the return. If you look at the last six months, the DJ Real Estate index has roughly doubled since March – that’s a big move.”
The iShares FTSE NAREIT Industrial Office Capped index fund emerged second over three months with a return of 44.17%. The fund measures the performance of the industrial and office real estate sector and is one of the eight property funds iShares offers. Axel Lomholt, head of product development Europe at Barclays Global Investors says property ETF investors generally have long-term investment horizons, and have been comfortable riding out the tough 2008-2009 cycle.
He explains: “At iShares we spend a considerable amount of time on index selection – analysing, building and designing indices, if required. We need to make sure that the index gives the investor the best exposure possible.” He adds the funds are repeatedly tested to ensure creations and redemptions can be made in the market at any time.
In the UK, the commercial property market is in the early stages of recovery and investors have already reacted, with the FTSE 350 Real Estate index almost doubling since its low on March 9 this year. After London, Paris offers the second most liquid market and together these two constitute 40% of the European property investment landscape.
“When the UK commercial market improves it has a marked impact on European indices,” says Keith Sutton, manager with the Fidelity European Real Estate fund.
“We’ve seen similar changes in UK derivatives pricing, with the latest figures for 2010 – 2013 showing expectations of almost 10% per annum,” he says. The other countries in Central and Eastern Europe are nowhere near this tipping point, and it is too soon for investors to think about going back in, he adds.
Sutton explains that there are similar problems in Spain, and a significant recovery is not anticipated to occur before 2011, although there may be some opportunities in distressed sales. He adds: “We also still think Italian markets are wrongly priced and remain quite a closed shop.”
The iShares FTSE EPRA European property fund was second over one year, returning 42.03% according to Morningstar. The fund came in first place over three years, at 7.06%. Six of the ten top performing funds over the three-month period track FTSE indices. A spokeswoman for the index provider says there has been strong interest from ETF issuers in the FTSE EPRA/NAREIT index series, which is one of its most popular investment areas.
She says: “This asset class has strengthened to produce liquid investment opportunities in both real estate operating companies and publicly listed REITs, and has proven its success as one of the more desired alternative investments.” She adds in the current economic climate, investors need greater reliability and transparency to manage risk and return opportunities, within this asset class and across the board. She says: “Funds can benefit from looking to well researched and rules driven tools and benchmarks. Only then will investors appreciate the diversity and benefits represented by the asset class.”
Leader of the pack
Over five years, the iShares CDN REIT Sector index fund, listed on the Toronto Stock Exchange, topped the table. iShares’ Lomholt says: “In order to determine which is the best performing fund in a certain category you need to map all the ETFs that track the same benchmark. Even the smallest tweak makes a difference.” He explains this is because an ETF will accurately track the underlying benchmark and therefore the performance of the fund is, more or less, equal to the performance of the reference index.
The EasyETF FTSE EPRA EuroZone ETF emerged second over the five-year period at 62.33%. Danièle Tohmé-Adet, head of product development at BNP Paribas EasyETF, says commentators are watching property once again. She explains that property is not just a useful diversification tool, and is growing significantly in particular regions. She adds: “In particular, emerging market areas like Hong Kong are seeing some of the largest deals ever happening, demonstrating some of the building interest in property.”
[asset_library_tag 339,Chart: Real estate ETFs]
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation