Saturday, 2 June 2012

Investing in International Property ETFs

Property is often an attractive income generating investment. This article looks at the range of REIT ETFs on offer at ishares. There are five to choose from; Developed World, USA, UK, Europe, and Asia. We will attempt to value each of them and find out which is the most attractive to investors.

Valuation Model

The model we will use to value these funds is similar to the one we used to value stocks.

Our growth rates will be based on IMF forecasts. The growth rate will be 25% of the real GDP growth rate plus 2.5% as our inflation estimate to give the nominal growth rate. I'm of the opinion property prices should raise at the rate of inflation, but clearly as people get richer they tend to put more of their money into property as a form of investment. So using inflation plus a small growth factor based on real GDP growth is a conservative way of estimating the future growth rate.

Finally, we will use an adjustment rate based on a 5% historical yield.

Total Return = Gross Yield + Growth Rate + Adjustment Rate - Expense Ratio


We'll start close to home with ishares FTSE EPRA/NAREIT UK Property Fund. The expense ratio is a modest 0.4% a year and the current distribution yield is 3.34% (gross yield 3.74%).

IMF forecasts for the UK economy are 0.8% in 2012 and 2.0% in 2013. This gives an average of 1.4% a year real growth. 25% of this added to our inflation expectations gives a 2.85% growth rate.

The fairly low yield on the fund gives an adjustment rate of -1.44%.

Total Return = 4.75% a year


Next let's look at ishares FTSE EPRA/NAREIT US Property Yield Fund. Again the expense ratio is 0.4% a year but the distribution yield is a more modest 2.85% (gross yield 3.25%)

IMF forecasts are a bit more positive for the US economy with 2.1% for 2012 and 2.4% for 2013 giving an average of 2.25% a year. Using the above we get a growth rate of 3.06% a year for our model.

The lower yield on the fund gives us a higher adjustment rate of -2.13%.

Total Return = 3.78% a year

Europe (IPRP.L)

For Europe the expense ratio on the FTSE EPRA/NAREIT European Property Index Fund is 0.4% with a distribution yield of 3.05% (gross yield 3.45%)

IMF forecasts for Europe are fairly bleak with -0.3% for 2012 and 0.9% for 2013 giving an average of just 0.3% a year. That gives us a nominal growth rate of 2.57% a year for our model.

The adjustment rate is -1.84% based on the current yield.

Total Return = 3.78% a year (same as USA)

World (IWDP.L)

For the ishares EPRA/NAREIT Developed Markets Property Yield Fund the expense ratio is a higher 0.59% a year with a distribution yield of 3.14% (gross yield 3.73%)

IMF forecasts for advanced economies is 1.4% for 2012 and 2.0% for 2013. This gives an average of 1.4% a year. Putting this into our model gives us a growth rate of 2.85% a year.

The adjustment rate on the fund is -1.45% based on the current gross dividend yield.

Total Return = 4.54% a year

Asia (IASP.L)

Finally looking at ishares EPRA/NAREIT Asia Property Yield Fund. Again the expense ratio is 0.59% a year but the distribution yield is a more impressive 4.15% (gross yield 4.74%)

As the fund mainly invests in more developed Asian economies we will use the IMF forecasts for the newly industrialised Asian economies. The forecast for 2012 is 3.4% and for 2013 4.2%. This gives us an average of 3.8% which will equate to a growth rate of 3.45% a year for our model.

Adjustment rate is low for this fund due to the high yield. -0.27%

Total Return = 7.33% a year


The table below gives a summary of the above data. Clearly the Asian fund looks the best with a higher yield and higher growth rate. The World fund would give an almost identical return to the UK fund if it wasn't for the higher expense ratio.

Gross Yield
IMF forecast
Growth Rate
Adjustment Rate
Annual Return

A quick glance at some of the charts


So far this year the Asian fund has been in a uptrend breaking it's 100 day high in January, February and March. It's currently near its 100 day low but hasn't broken through it yet, potentially giving us a good buying opportunity.

For the US Property fund, well I'm afraid you missed the boat on this one. The price rose from a low around 500 at the beginning of 2009 to a close not far off 1400 last week.

1 comment:

  1. Wow, wished I'd bought that American fund :P