ETF Analysis – Real Estate

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ETF WEEKLY REPORT

                                                                       October 30 2021

 

I – Global information and fundamental analysis about inflation

An exchange traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index. In this report, we’ll focus on the Real Estate.

It is a stock market product that allows you to invest in the shares of listed investment companies (REITs) in developed countries. These are listed companies that invest in commercial real estate and earn their income from rents and capital gains.

Chart 1 : Consumer Prince Index (CPI – USA)

 

Source : Seeking Alpha

We can see that in 2020, REITS underperformed in 2020. The ones that have suffered the least are the large funds that are less volatile but also have lower returns.

The real estate ETF offers interesting prospects for those who wish to diversify their portfolio. Although the primary objective of a PEA is to invest in the most profitable stocks in the long term, don’t forget that you can also secure your portfolio with other asset classes, particularly real estate, which is less sensitive to stock market crashes. And for that, the REIT ETF is a solution not to be missed.

 

Among the advantages offered by real estate trackers, it should be noted that they can be bought like shares. You can therefore buy or sell them at any time. The real estate ETF allows you to invest in the stock market and buy real estate indirectly at the same time.

Chart 2 : REIT Volatility

Source : REIT

We can distinguish 4 potential problems related to the rise or fall of prices, as shown in the graph below.

The 1st situation concerns a rise in inflation with a fall in growth, which corresponds to stagflation. This situation is feared by all economists. The second situation is linked to inflation and growth is increasing, which is what seems to be happening in the current situation with an increase in growth following the end of the health crisis, in addition to which there is the beginning of inflation. The other situation is like what happened in Japan. Price declining with economic climb. The last situation is the deflationnary boom : economic growth associated with a price decrease

 

Over the past 10 years, the gross performance of real estate ETFs has been close to 13% per year. These assets perform particularly well when interest rates are low, since most of their activity is financed by debt.

 

Investing in real estate via ETF seems to be an opportune investment in a context of inflation with low interest rates that are established in the long term. You have to be careful because it remains a financial product and there is always a risk of capital loss. Finally, real estate crises can also happen as in 2007 in the United States. It is thus necessary to be careful. Moreover, with the crisis of the COVID and the international deployment of the telecommuting, we notice that the demand of offices decreases, that the inhabitants of the cities desert them to settle in periphery in order to have more spaces during their weekends or days of telecommuting. It is therefore necessary to pay attention to this variable because the offer remains the same with sometimes very high prices. A shock in demand could therefore generate one of the possible future real estate crises

2 – ETF Analysis

Lyxor PEA Immobilier Europe (FTSE EPRA/NAREIT) UCITS ETF – Capi.

Chart 3 : Funds characteristics

Source : Lyxor

Chart 4 : Performance

Source : Lyxor

Chart 5 : Top 10 Holdings of the fund

Source : Lyxor

In conclusion, adding real estate ETFs to your portfolio will allow you to diversify your risk and your income. We have seen that the sector is supported by a low interest rate environment but that one should be careful about a possible real estate bubble in some large cities such as Paris. With the crisis of the covid, the sector is also under pressure with a decrease of the demand and a constant offer. The proposed ETF will allow for European exposure, taking advantage of shopping center and office rents.

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