Real Estate ETFs: Property stocks well-placed to outperform

Feb 10th, 2012 | By | Category: Alternatives / Multi-Asset

Global real estate stocks are emerging from recession leaner, better financed, and well-placed to take advantage of the expected pick-up in demand for commercial property space when economic recovery gathers pace, according to a recent report from AXA Framlington.

Real Estate ETFs - Property stocks likely to outperform as global economic recovery gathers pace

Property stocks are likely to outperform as global economic recovery gathers pace, says Axa Framlington.

Frédéric Tempel, Head of European Real Estate Securities for AXA Framlington said: “While the market and economic environment has turned cloudy over recent months, we believe the current problems are not sufficient to derail the positive outlook for commercial real estate.

“The global economy remains expansionary and commercial property fundamentals are generally improving, as steady demand for space continues to outstrip historically low supply. Meanwhile, ongoing extremely low interest rates mean the yield available from real estate remains compelling.”

Tempel added that in an investment world where yield is hard to find, global real estate equities currently offer an attractive dividend yield in the range of 3.0% – 4.0%. As market fundamentals improve, average dividends should rise further over the next couple of years.

He said that while real estate stocks are obviously not immune to the negative fallout from the financial crisis, the sector has emerged a leaner, stronger, less indebted and altogether better positioned asset class. As global economic recovery gathers momentum, any capital appreciation will translate into significant rates of return for investors.


iShares FTSE EPRA/NAREIT Developed Markets
Property Yield ETF

– Diversified exposure to the developed world’s
largest high-yielding Real Estate Investment Trusts

– Physical replication with full transparency to
underlying holdings. Over $1.4bn in AUM

– UCITS III compliant, LSE-listed, UK Reporting
Status, eligible for ISAs and SIPPs

– TER of just 0.59%, typically less than
actively managed property funds

The general scarcity of prime global commercial real estate supply is very supportive for the sector, which has pronounced supply/demand cycles – a product of the long construction lead times required to develop most properties. In the wake of the financial crisis, funding for new projects evaporated and construction in developed markets fell to historically low levels.

As the global economy recovers, vacant space in existing buildings will be quickly absorbed by growing demand and landlords will regain the ability to increase rents, leading to higher operating income and boosting property values. Quoted real estate companies tend to hold mainly quality prime assets in their portfolios, so are likely to particularly benefit from this market trend.

Frédéric Tempel concluded: “Commercial real estate values in developed markets remain well below the peaks of the last economic cycle. What’s more, current property equities price levels appear low compared with direct real estate valuations, with stocks, in many cases, trading at significant discounts to estimated net asset value (NAV). This situation represents significant recovery potential for real estate securities.”

For investors seeking exposure to global real estate equities specifically via ETFs, the leading UK-listed fund in the sector (by assets under management) is the iShares FTSE EPRA/NAREIT Developed Markets Property Yield ETF, which as of 9 February 2012 had over $1.4 billion invested in it.

iShares FTSE EPRA/NAREIT Developed Markets Property Yield ETF (ticker code: IWDP) tracks the FTSE EPRA/NAREIT Dividend+ Index. This index is designed to measure the performance of higher-yielding stocks within the universe of the FTSE EPRA/NAREIT Developed Index. The index represents stocks that have a one-year forecast dividend yield of 2% or greater which are then weighted by market capitalisation, and enables investors to take advantage of REIT tax efficiency while capturing the long-term effect of higher compounding returns. 

The fund’s top five country weights are the US (48.07%), Hong Kong (12.99%), Australia (9.80%), Canada (6.27%) and UK (4.89%).


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