Monthly Archives: August 2013

CRE ETFs in investor asset allocation strategies

Pension, insurance funds and other investors are looking for alternative asset allocation methods to include real estate as an asset class. According to Consilia Capital and Property Funds Research in a study published by EPRA (European Public Real Estate Association, 2013) real estate securities funds have grown by 68% in AUM between 2007 and 2012 and by 39% in number of funds. This figure also includes CRE ETFs. One key advantage supporting this growth is the liquidity of real estate securities funds in general. This allows investors to react quickly to market changes.

But there are additional advantages choosing a CRE ETF instead of a real estate securities fund. While they offer the same return profiles and volatility, trading costs are significantly lower and liquidity is guaranteed through a registered stock exchange. They are even more liquid allowing for intra-day trading strategies being executed to gain access to very short term returns, for instance due to intra-day differences in trading price vs fund NAV.

CRE ETFs also provide investors with more flexibilities to adjust to market changes in the underlying real estate market by allowing to shorten a specific market. Just like individual shares, CRE ETFs can be sold short. For example an investor may choose a diversified portfolio of real estate stocks or a real estate private equity fund as their core real estate investment, but before they can exit, the market declines. The investor can now short his exposure in the segment using a CRE ETF as a hedge.

A similar strategy is possible for investors in specialist real estate private equity funds, by choosing a special CRE ETF tracking a specific benchmark such as UK industrials, although the hedge might not be as perfect. Options are limited in Europe through the limited amount of specialised real estate property companies. In addition the sector allocation through a basket of listed real estate securities might not be as purist as with a real direct property investment.

Trading CRE ETFs can also be a intermediate strategy for private pooled real estate funds to breach the gap until an appropriate property has been found. Investors will receive a real estate return with the same liquidity as a money market fund at a very low trading cost. There is also no minimum investment amount, because these products are essentially designed for retail investors.

Peak to trough – CRE ETFs during the crisis?

Peak to trough performance during the crisis

During the 2008/2009 liquidity crisis property values in developed markets around the world fell 40-50%.

Also CRE ETFs have been affected and comparing the five European listed funds the pricing index (Jan 2007 = 100) shows the EPRA US Property ETF falling to an index -42 by March 2009. The strongest fall was experienced for the EPRA UK Property ETF to an index value of -64 in August 2009.

EUR Performance

The first fund to react to the Lehman bankruptcy was the EPRA Developed market property ETF falling to -24 in Sept 2008, much earlier than any of the other property ETFs.  The European investment property ETF IPRP shows less decline (lowest index level of -3 in Sept 2009) than the UK fund. This observation is consistent with actual property price observations in Europe such as Germany and France compared to the UK.

The fund that has performed best during the crisis was the EPRA Asia Property ETF with the lowest index level of 19 in Jan 2009.

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UK & US CRE ETF performance ahead of global universe

A quick look into 5 LSE listed real estate ETFs confirms Europe’s performance excl the UK is lagging behind due to unresolved economic and political issues.

Europe

Over a 3-year horizon the iShares FTSE/EPRA European fund (IPRP) has exhibited a correlation of 82% with the UK EPRA index, while the iShare FTSE EPRA UK fund (IUKP) has shown a close correlation of 85%. Europe’s fiscal austerity and tight credit conditions continue to add stress on the listed real estate sector with the latest casualty German property company IVG facing insolvency.

UK property H1 2013: What do the agents say?

More insight is given by several agents reporting on Q2 2013 real estate investment performance such as JLL http://www.joneslanglasalle.eu/EMEA/EN-GB/Pages/EuropeanOfficePropertyClock.aspx

CBRE Q2 2013 commentary on the UK market:

http://www.cbreglobalinvestors.com/research/publications/Documents/Market%20Commentary/Q2%202013%20UK%20Quarterly%20Market%20Commentary_white%20paper%20format.pdf

London’s advantages as a global city in Europe (views by CBRE)

http://portal.cbre.eu/portal/page/portal/RRP/ResearchReportPublicFiles/CENTRAL_LONDON_VP_THE_LONDON_PARADOX_JUNE_2013.pdf