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Global listed real estate—getting noticed by the industry

By: Catherine Yoshimoto, Senior Index Product Manager

Real Estate Investment Trusts (REITs) were first developed in the United States in the 1960s as a means of providing a tradable, liquid alternative to traditional real estate investments. Though slower to catch on in the rest of the world, in the last decade there has been a significant increase in the use of these investment structures in countries outside the US.

As the global REIT market has grown, market participants have looked for ways to track this market in its various segments, through the 36 countries represented in the FTSE EPRA/NAREIT Global Index as of December 2016. In this blog we look at the characteristics of REITs and the historical performance of the FTSE EPRA/NAREIT Global Real Estate Index Series post the 2008 global financial crisis.

As described in an earlier blog focused on US REITs, REITs are companies that own or finance income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders.[1] In turn, shareholders pay the income taxes on those dividends. The income portion is of particular interest due to the requirement that a REIT distributes 90% of its taxable income as annual dividends in many jurisdictions.[2]

In Europe, which was particularly hard hit by the 2008 global financial crisis, record low short-term government rates significantly reduced the interest costs associated with REITs. This combined with the financial troubles in countries like Greece, Spain and Italy have likely driven the increased interest in this asset class in this area of the world, as demonstrated by €1.4B estimated net inflow into the Real Estate equity sector in 2016 compared to €44.4B outflow for large cap Europe equity over the same period.[3]

In February of 2005, FTSE International launched the first index in the FTSE EPRA/NAREIT Global Real Estate Index Series. The graph below shows the annualized risk/return performance of the FTSE EPRA/NAREIT Developed Index, FTSE EPRA/NAREIT Europe Index and FTSE EPRA/NAREIT Global Index over the last three years as compared with each of their broad equity market counterparts.

 

The chart below illustrates the breakdown of the cumulative total return over the last three years for each of the indexes shown above split into the price component (capital appreciation) and the income component (dividend reinvestment). As we can see, the total return of the EPRA/NAREIT Europe Index was driven by a large capital appreciation component—which is unusual for a REIT based index. This may indicate that underlying properties held by listed real estate companies were purchased at a deep discount during the time of economic troubles in Greece, Spain and Italy in 2014 and 2015.

As these results show, listed international real estate stocks may be an integral part of a globally-oriented asset allocation scheme. Some market participants have, for instance, used these indexes as building blocks within target date funds. The higher index returns of the FTSE EPRA/NAREIT Global Real Estate Index Series compared with their broad market counterparts certainly warrant closer analysis. Particularly interesting at this time is the analysis of the income return component of the Index Series, as many market participants look to identify sources of equity income to assist in the management of risks such as the possibility of rising rates or inflation.

For more information on various segments of the global market, follow the FTSE Russell blog.

 

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[1] EPRA Global REIT Survey 2016: http://www.epra.com/media/EPRA_REIT_2016_GLOBAL_1481196802652.pdf

[2] EPRA Global REIT Survey 2016: http://www.epra.com/media/EPRA_REIT_2016_GLOBAL_1481196802652.pdf

[3] Morningstar Direct, Europe OE & ETF ex MM ex FOF ex Feeder funds data as at November 30, 2016.
 

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