Update: iShares Developed Markets Property Yield UCITS ETF

Indirect real estate 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 investments via real estate funds behave quite differently from direct property investments. Most notably, these funds tend to have high correlations to stock markets and thereby little diversification benefits for a portfolio during market stress. Nevertheless, real estate funds offer a few advantages to investors compared to direct property investments, e.g. no required mortgage or maintenance, higher liquidity and price transparency.

In general, REITs tend to provide a consistent dividend yield for shareholders, thus making them specifically interesting for income-seeking investors. This ETF distributes dividends on a quarterly basis.

Fundamentale Analyse

This ETF offers exposure to the world’s largest listed REITs operating in developed markets. These mainly engage in owning, developing and operating income-producing real estate assets. Investors in this ETF gain exposure to retail, industrial & office, real estate holding & development and residential REITs.

REITs are cash-flow driven investments that normally distribute the larger proportion of their net income as dividends, thus resulting in a higher yield compared to common stocks. In the US for example, over the last two decades, the dividend yield of the FTSE NAREIT Equity REIT Index averaged 3.3% versus 2% for the S&P 500, leading to an outperformance of 1.5% in total return terms.

Easy access to capital markets and organic growth on the back of increased consumer spending helps REITs grow their dividends over time, thus potentially providing an attractive total return opportunity for long-term investors.

Having said that, global real estate took a serious hit during the global financial crisis, losing nearly 70% from October 2007 through to March 2009. However, by end April 2015 the index had recovered the lost ground, trading 17.5% above its pre-crisis peak.

In the US – by far this ETF’s largest geographical exposure – the recovery has been strongly aided by the Fed’s QE programme, which included large-scale purchases of agency mortgage-backed securities (MBS). The programme proved to have positive effects on supporting the mortgage market through lowering MBS yields and US mortgage rates, in turn taking off pressure from the broader property market.

As an asset class, property has benefited from the improvement in the developed economies’ growth outlook on the back of increasing consumer spending and falling unemployment. All the while, the prolonged low-rate environment has pushed yield-hungry investors to increase their allocations to REITs.

In general terms, investors in REITs should focus closely on developments that impact the companies’ ability to generate net cash flows. Most notably, an increase in interest rates should put pressure on the companies’ balance sheet, asset values and ultimately reduce the cash flow. Likewise, any contraction in global consumer spending and manufacturing activity would limit organic growth.

In addition, the rapid growth of online commerce business should be expected to continue putting pressure on the retail real estate segment, with lower overheads per unit sold and a higher bargaining power on the side of would-be buyers/renters.

Indexkonstruktion

The FTSE EPRA/NAREIT Developed Dividend+ Index is a subset of the FTSE EPRA/NAREIT Developed Index, structured so as to represent general trends in global real estate investment trusts (REITs) and real estate holding and development companies that have a one-year forecasted dividend yield of 2% or above. The index composition is reviewed annually in September. In order to be eligible for inclusion at rebalancing, at least 75% of a company’s EBITDA in the previous financial year should have come from relevant real estate activities. In addition, all components are screened for FTSE’s requirements on investability and liquidity. The index is heavily weighted towards the US (55-60%), followed by Hong Kong (7-10%) and Australia (5-7.5%). Retail is the biggest sector (30-35%), which together with industrial & office (20-22%) make up half of the portfolio. As we write, the index has 268 components with an average market capitalization of $4.2bn and a 3.63% gross dividend yield. The largest constituents are Simon Property Group (5-6%) and Public Storage (2-3%).

Fondskonstruktion

iShares uses full physical replication to track the performance of FTSE EPRA/NAREIT Developed Dividend+ Index, thus purchasing all securities in the same weightings. The fund uses futures for cash flow and dividend management purposes. This is standard practice and helps limit tracking error. iShares engages in securities lending within this fund to improve its performance. The gross revenues generated from this activity are split 62.5/37.5 between the fund and the lending agent BlackRock, whereby BlackRock covers the costs involved. The fund lent out lent out 3.30% on average over the 12 months ending March 2015. To protect the fund from a borrower’s default, BlackRock takes collateral greater than the loan value. Collateral levels vary between 102.5% and 112% of the value of securities on loan, depending on the assets provided by the borrower as collateral. Additional counterparty risk mitigation measures include borrower default indemnification. Specifically, BlackRock commits to replace the securities that a borrower would fail to return. The indemnification arrangement is subject to changes, and in some cases without notice. Finally, BlackRock limits the amount of assets that can be lent out by this ETF at 50%.

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 investing in this fund which are not included in the TER are rebalancing costs, bid-ask costs and brokerage fees. Income generated from securities lending helps recoup some of the total costs. In the year to end April 2015 the fund underperformed its benchmark by 0.13%.

Alternativen

As of writing, there are five other ETFs providing exposure to the global property market, all of which are significantly much smaller in size than the iShares fund.

The two biggest are the HSBC FTSE EPRA/NAREIT Developed ETF (physical; TER 0.40%) and the Lyxor FTSE EPRA/NAREIT Global Developed ETF (synthetic; TER 0.45%). Both track the FTSE EPRA/NAREIT Developed Index, which offers somewhat similar geographical exposure – e.g. US (48-52%), Japan (13-16%), and Hong Kong (6-8%), but does not filter constituents in terms of expected dividend yield.