Category Archives: Real estate analysis

2014 changes in European office property markets

Market growth Capital growth is continuing in key markets with London leading the pack. This is especially supported by further declining vacancy rates across all seven markets. Madrid is has been the biggest mover over the period from capital value decline to a 19% growth y-o-y Q3 2014, despite still relatively high vacancy. Capital growth (Q3 2013 – Q3 2014) Financep

Property yields vs interest rates All seven markets have started to display signs of yield compression. As a result of a further downward adjustment of 10yr government bond rates property yields remain at a healthy premium in most markets. Smallest premiums are achieved in Southern Eruoepan property markets such as Milan and Madrid, where property yields have started to decline more rapidly between Q3 2013 – Q3 2014.  Change in property yields (Q3 2014 – Q3 2014) Riskp

Property leverage market health Although there is still a healthy gap between London property net yields and the 10yr UK gilt rate (due to extremely low gilt rates), property financing is becoming more expensive if property yields keep declining further in the West End or the City of London in 2015. Yield gap (Q3 2014) CapG

In contrast available cheap lending margins in Germany allow for higher property income returns in Germany. (Data sources: Bloomberg, CBRE)

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.


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

CBRE Q2 2013 commentary on the UK market:

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

Real estate ETFs with largest discounts? Highest fees?

Week 4: The real estate ETF investment universe

The current analysis includes a total 47 real estate ETFs, which are being tracked in terms of their monthly performance, fees, yield and AUM.

After taking over the management of the Ishare universe Blackrock is by far the largest real estate ETF fund manager by number of funds with a market share of c38%, however by AUM Vanguard has a market share of 41% compared to Blackrock (35%). Although Vanguard does not offer many real estate ETFs it is managing the currently largest real estate ETF, which has a market share of 40% alone.

Figure: Fund Universe by Fund Manager


Source: Various, N. Lux, 2013

Most real estate ETFs are listed in the United States (c84%) and another c14% in Europe. As expected, also 68% of the funds have the U.S as their investment target, followed by 27% which focus on global strategies. Only 4% of strategies focus on Europe as an investment market.

Figure: Universe by investment target


Source: Various, N. Lux, 2013

Until now, 98% of real estate ETFs offered, follow a passive replication strategy. Most popular indices are subindices of the FTSE NAREIT or EPRA universe.

Figure: 10 Largest real estate ETFs



Fees are dependent on the fund manager and the investment strategy. Some smaller fund managers might not be as competitive in fees as larger ones. On average management fees are 46bps, with the majority being offered between 40-50bps. Within the same fund manager, the most popular fund will be offered at the lowest fees, while they might increase for certain other strategies. For example global strategies are typically priced slightly higher at 50-60bps.

Figure: 5 most expensive ETFs


Premium/Discount to NAV

ETFs typically trade very close to their NAV. Most real estate ETFs will be trading at a slight discount of 1-20bps. There are currently only 4 real estate ETFs which are trading at a premium.

Figure: 10 largest discounts


While the premium/discount for property shares is often an indicator of company size and liquidity, there is no correlation between ETF fund size and its discount/premium pricing. ETFs with the lowest discounts typically have their primary listing on the NYSE and have their investment benchmark focused on the United States. The few funds currently listed on the LSE appear to have the largest discounts.

Week 5: Performance & standard deviation

Commercial real estate risk news

What’s new in risk modelling?

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After more than 10-year of professional experiences, I decided, it was time to share my knowledge. Today, there are strong forces in the financial industry pushing for the less developed commercial real estate market to adopt more complex quantitative approaches in assessing real estate risk. However, knowledge is often not passed on and materials available have not kept up to include new models and concepts to ensure they become common practice and general industry knowledge.
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