AFR ETF series: property

Australian Financial Review, Smart Money, June 2011

Real estate is one of the many individual sectors of the Australian stock market that can be invested in through ETFs. State Street offers the SPDR S&P/ASX Listed Property Fund; Vanguard has the Australian Property Securities Index ETF.

Getting property exposure in a passive way is not, in itself, new; the Vanguard ETF, for example, replicates an existing index managed fund the manager launched back in 1998. “It’s been a really popular product in Australia and a key part of Australian advisors’ allocations,” says Robyn Laidlaw at Vanguard. “By adding an ETF [which it did in October] we have offered a new group of investors or advisors a different way of buying exposure to the Australian property securities index.”

Is a passive approach the best way to go with real estate? It is, like small cap stocks, an area where active managers think that being selective is particularly important. “If an investor decides they want access to property securities, they are really thinking about their overall asset allocation, and about achieving diversification through holding a range of asset sectors in the portfolio,” Laidlaw says. “So with a property securities ETF, they are getting a diversified exposure to a range of Australian listed property securities. They can then make the choice of whether they want to be active in this space, passive, or have a combination of the two approaches.”

Similarly at State Street, Frank Henze, the head of SPDR ETFs in Asia Pacific, says that real estate ETFs are “not so much in competition with active, but give a different service. It’s a different type of product, controlled through a methodology which is transparent and open. It’s not that you have to go [only one of] active or passive.”

The idea of an index exposure to property is that it behaves, broadly, in the way that we hope all property will in aggregate: modest capital growth, stable income stream, and through an ETF, ready liquidity since it can be bought and sold like any other stock. Real estate is one of the higher yielding arms of the Australian market: the S&P/ASX300 A-REIT index, which the Vanguard index tracks, has a current yield of 5.7%.

Real estate does involve a number of different sub-sectors with quite different return characteristics: retail property like shopping centres; office property, which again varies widely according to its precise location; industrial or logistics facilities, residential tower blocks, even hotels or hospitals. An ETF brings a diversified exposure across those sub-classes.

Real estate is, though, a slightly odd sector in Australia, because it is very heavily skewed towards one name: Westfield Group is 27.81% of the State Street fund (28.7% of Vanguard) and Westfield Retail Trust a further 11.06% (10.7%). (State Street numbers are from April 30, Vanguard from March 31.)

There are not, yet, any international real estate ETFs available in Australia, though when Laidlaw is asked about it, it sounds like they may not be too far away. She says Vanguard is making building blocks for advisors to build portfolios, and says: “We have an international property securities index fund already available, and we will look to add to the ETF range where we see there is demand from advisors to have those offered as an ETF.” She says it is early days for product development in Australia, but could see the market “potentially in future going to extend to international property securities.”

What would such a fund look like? Well, Vanguard’s existing international index fund, a wholesale product, has 64.4% of its holdings in North America, 15.2% in Europe ex-UK and another 7.4% in the UK, 7.8% in ex-Japan Pacific, and 5.4% in Japan. It has a roughly even split between office, retail and diversified property – each about a quarter apiece – with 12.1% in residential, 8.2% in industrial and 4% in hotels. The top three holdings are the USA’s Simon Property Group, the French group Unibail-Rodamco, and another American holding (as are nine of the top 10), Equity Residential.

At the other extreme, some ETFs specifically aim to exclude real estate. Both Australian Index Investments (AII) and State Street offer financials ETFs with A-REITs removed. That’s more an attempt to offer pure exposure to financial services companies than any particular beef with property; AII, for example, also offers a financials ETF with the real estate stocks still in.