As equities continue to rally, nearing all-time highs, and bond yields enter negative territory, fund managers and selectors seeking higher returns and portfolio diversification have been turning to property as an alternative.
The COVID-19 global health crisis has intensified investor’s interest in real estate as an asset class, as they believe markets have been overly pessimistic when it comes to property, especially within commercial office property as everyone was forced to work from home. At their lowest point, shares of major REITs (Real Estate Investment Trust) dropped more than 50%, providing what many property investment experts believe as a unique opportunity to invest in property funds at a discounted price compared to net asset value.
“These are opportunities that just don’t exist in the private markets,” Mr. Dickerman, President of REIT Madison International Realty LLC, said when discussing the firm’s $20+ million investment in REIT shares during the months of March and April.
Experts also believe the negative sentiment towards office buildings caused by the forced work-from-home during the virus lockdown is unwarranted, and big players like Blackstone and Brookfield “continue to see robust tenant demand for high- quality office assets in European gateway cities.”
Property fund holdings largely consist of REITs, who are legally required to distribute at least 90% of taxable income to shareholders, making property funds highly attractive for income-seeking investors. These funds also tend to provide a relatively broad exposure across the property industry and tend to be less correlated to the overall stock market, making real estate an interesting diversification strategy.
Passive ETF Real Estate
Within the property investment sector, fund selectors can opt for a more passive strategy through ETFs, of which the largest funds in Europe track the FTSE EPRA/NAREIT property index series, co-sponsored by the leading global real estate associations: the European Public Real Estate Association (EPRA) and the National Association of Real Estate Investment Trusts (NAREIT). Below we highlight two index-tracking property funds that fund selectors should take note of:
|ETF Real Estate||Fee||Fund creation|
|iShares European Property Yield UCITS ETF||0.40%||2005|
|Amundi FTSE EPRA Europe Real Estate UCITS ETF||0.35%||2018|
iShares European Property Yield UCITS ETF
This BlackRock fund’s three largest holdings are German, making up 35% of the fund, and a reassuring sign for investors based on historical dominance of the German corporates in the property fund sector. Worth noting is the fund’s exclusion of the UK property sector, which has been under much turmoil lately with Brexit. Countries available: France, Germany, Italy, Netherlands, Switzerland, UK.
Amundi FTSE EPRA Europe Real Estate UCITS ETF
As Europe’s biggest asset manager, Amundi’s recent acquisitions within property demonstrates the attractiveness of real assets as we emerge from the COVID-19 pandemic. Countries available: France, Germany, Italy, UK.
Active management: European Real Estate Funds
Investors looking for higher potential returns within property may opt for a more active fund. While management fees will certainly be higher than ETFs, there is a case to be made regarding the upside potential of an experienced property fund manager in capital allocation. Highlighted below are two European property funds, one from Janus Henderson and the other from Cohen & Steers.
|Real Estate Fund||Fee||Fund creation||3-year annualized performance|
|Cohen & Steers SICAV European Real Estate Securities Fund (LU0187263511)||1.40%||2002||6.67%|
|Janus Henderson Horizon Pan European Property Equities Fund (LU0088927925)||1.88%||1998||6.51%|
|BMO European Real Estate Securities Fund (IE00B5N9RL80)||1.79%||2010||4.06%|
Source: data as of 30/06/2020
Cohen & Steers SICAV European Real Estate Securities Fund
This Cohen & Steers European real estate fund is an attractive option for European fund selectors looking to benefit from the firm’s dominance and expertise in real assets. The fund currently has over 16% of holdings in Scandinavia and has provided investors with positive yields and returns over the years.
Janus Henderson Horizon Pan European Property Equities Fund
With a cautious approach to retail property, this pan-Europe fund focuses instead on industrial/logistics, rental residential, healthcare, self-storage, and student accommodation – all sectors predicted to deliver steady rental growth and in turn solid shareholder return.
BMO European Real Estate Securities Fund
BMO European Real Estate Securities Fund invest in Pan-European real estate equities. While the COVID-19 working environment will result in more remote working, it will also require a significant reduction in the density of occupation in the workplace. The ultimate dominance of one of these opposing forces will determine the outlook for offices. The result will of course be far more nuanced, but we believe developers with the skills to buy the right sites from nervous sellers will still deliver good returns, even in a subdued market.