EasyETF FTSE EPRA Eurozone (EUR) | EEE |
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Gordon Rose, CIIA04.04.2013
Hensiktsmessighet
The EasyETF FTSE EPRA Euro zone ETF provides exposure to listed real estate companies and Real Estate Investment Trusts (REITs) from the Eurozone. The FTSE/EPRA Euro zone Index has exhibited a high degree of correlation to international stock markets over the last three years; hence potential diversification benefits derived from adding this fund to one’s equity portfolio are limited. The index had a correlation coefficient of 0.72 as measured against the STOXX Europe 600 Index and 0.72 against the MSCI World USD Index over the last three years.
REITs can either be used as a core holding or as a tactical call to tilt the investor’s real property exposure to a certain part of the real estate market. Therefore, this ETF may be suitable for investors with a favourable outlook on the eurozone real estate market, and the market in France in particular as the index allocates 52% of its value to French firms.
Property ETFs offer investors exposure to a traditionally illiquid asset class that has historically exhibited stock-like returns and bond-like income streams. However, investors should be aware that direct property investments behave quite differently from investments via real estate funds; meaning that funds tend to have high correlations to stock markets and thereby limited diversification benefits for a portfolio. Nevertheless, real estate funds offer a few advantages for investors compared to a direct property investment, e.g. no required mortgage or maintenance are required and improved liquidity versus direct investment.
Fundamentalt syn
After the ECB’s commitment in mid-2012 to do “whatever it takes” to preserve the euro, the Eurozone sovereign debt crisis seemed to ebb off. However, events in early 2013 (e.g. Italy’s inconclusive election; Cypriot banking crisis; Spain’s political corruption scandals) have reignited fears of the crisis resurfacing. In addition, the federal election in Germany due in autumn could weigh on investor sentiment going forward.
The political picture is further complicated by a worsening macro backdrop. Eurozone GDP contracted for the fourth consecutive quarter, dropping 0.6% q/q in the fourth quarter of 2012 on a mix of falling private consumption (-0.4%), investment (-1.1%) and both exports and imports (-0.9% each). Given the current mixture of high unemployment, falling incomes and the ongoing sovereign debt crisis, it is likely that the Eurozone will continue to be plagued by uncertainty in the coming months.
Against this downbeat overall backdrop, however, the REIT sector has proved one of the best performing sectors of global equity markets. The FTSE EPRA Euro zone Index has outperformed global equities, increasing 9.8% per annum. By way of comparison, the STOXX Europe 600 Index has returned 7.2% and the MSCI World Index is up 8.2%. The sector has benefited from strong balance sheets and access to low-cost financing.
However, not all signs are positive. Volume in the European real estate market was almost flat in 2012. According to Jones Lang LaSalle, direct investment in European real estate totalled $159bn in 2012, reflecting a 4% decline in volume versus 2011. This is despite a good performance in Q4-12, with volume up by 81% q/q and 29% y/y. It is clear that the European real estate market has not been immune to challenging debt market conditions and therefore little changes are expected in 2013. Jones Lang LaSalle blames the limited finances in that the market remains driven by investors focusing on core, low risk assets. The three major markets (UK, Germany and France) accounted for about 60% of the activities in Q4-12 alone.
REITs in mature real estate markets, like those in Europe are mainly engaged in owning and operating real estate assets. Going forward, it will be difficult for REITs to mirror their pre-crisis performance. The industry has benefited over the last decade from increasing leverage, lower interest rates, rising property values, and generally strong growth in property demand. For now, the current interest rate developments are supportive of real estate markets as the ECB is expected to hold interest rates as its historical low levels for a protracted period. However, borrowing costs will eventually rise again, thereby increasing the cost of capital for REITs, creating pressure on asset values and reducing cash flows.
Indekskonstruksjon
The FTSE EPRA Euro zone Index provides equity exposure to REITS in the Euro zone. The component stocks must derive the vast majority of their income from holding or developing property and be domiciled in the eurozone. The index is free-float market capitalisation weighted and the constituents must have a total free float adjusted market capitalisation of at least €50m. Components’ equity value traded on an official stock market—based on 3 months’ annualised volume—must be in excess of €25m and the company has to publish an annual report in English. The index is reviewed quarterly. Constituents must meet all criteria over two consecutive quarterly reviews before they can be included in the index. The average market cap of the index constituents is €1.9bn and therefore in the lower mid cap range as most REITs usually fall into this category. As of writing, the index holds 42 individual stocks and is heavily biased towards France (representing 52% of the index’s value), followed by Germany (20%) and the Netherlands (12%). As for individual holdings, the index’s largest constituent is Unibail-Rodamco (32%).
Produktkonstruksjon
The EasyETF FTSE EPRA Euro zone ETF uses physical replication to track the FTSE EPRA EuroZone Index. The fund owns all the securities within the index, in the same weightings as stipulated by the index. EasyETF engages in securities lending to generate additional revenues. The lending revenue generated can partially offset the TER. The fund receives 45% of the gross revenue while EasyETF and the lending agent receive 45% and 10%, respectively. To protect the fund from the counterparty risk that results from this practice, EasyETF lends out no more than 25% and takes collateral greater than the loan value. Collateral margins vary from 102% to 115%, depending on the assets provided by the borrower as collateral. Cash received as dividends from the underlying stocks is held in the fund’s income account until it is distributed to fund holders. Distributions are made on a quarterly basis. This dividend treatment can potentially create a drag on returns in upward trending markets as dividends are not immediately reinvested into the fund. In practice this cuts both ways. It could also result in outperformance if the benchmark falls in this interim period. The fund may hold up to 20% of its NAV in securities from a single issuer in order to track the benchmark. Under exceptional market conditions the fund manager has the right to invest up to 35% of the fund’s net assets in securities from a single issuer. Even though the fund’s portfolio mainly consists of transferable securities linked to the reference index, it may also invest in negotiable debt instruments, bond instruments, interest rate instruments, equities, securities and similar assets, units in UCITS and/or other UCIs issued by companies domiciled in a Euro zone member state. The fund may also enter into index-swaps or equity swaps and futures in order to achieve its objectives.
Avgifter
The fund levies a total expense ratio (TER) of 0.45%. This is the more expensive one of the two ETFs tracking the Eurozone property market. Other potential costs associated with holding this fund which are not included in the TER include rebalancing costs, bid-ask spreads and brokerage fees.
Alternativer
As of writing, there is only one like-for-like alternative ETF from db X-trackers tracking the FTSE EPRA/NAREIT Euro Zone TR Index offering Eurozone property exposure. db X-trackers uses synthetic replication and levies a TER of 0.35%.
However, there are many ETFs tracking a variety of different pan-European property indices. The largest alternative in terms of total assets under management is the iShares FTSE/EPRA European Property ETF. The ETF uses full replication, levies a TER of 0.40% and is more suitable for investors preferring developed Europe ex-UK exposure.
Investors wishing to include UK exposure might consider the db x-trackers FTSE EPRA/NAREIT Developed Europe ETF. The ETF uses synthetic replication, levies a TER of 0.40% and is biased towards UK property firms, which represent 36 % of the index’s value.
