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.

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