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Global REIT ETF Revolution?

Paul Baiocchi

Global real estate ETFs, for whatever reason, haven’t seen the innovation of their domestic counterparts.

And, as Devin described in his blog , this has left the door of opportunity wide open—a door Thomson Reuters and Global Property Research are hoping to walk into.

To be clear, Devin was decrying the lack of single-country and emerging markets real estate ETFs, not the dearth of broad market options. What Thomson Reuters and Global Property Research are doing with their new real estate index suite will add value.

Branded as the first “Highly liquid, investable real estate indices for the ETF” market, the index series includes a broad global index as well as regional indexes focused on Europe, Asia Pacific, the Americas and EMEA (Europe Middle East and Africa). The liquidity claim is based on the fund’s aggressive liquidity screen, which requires that a stock trade more than $3 million a day.

The index series has other wrinkles that make it interesting as well.

First of all, the broad 100 REIT index, in the name of being a truly global benchmark, has predetermined allocations to the regions of the world that it covers. Forty names come from the Americas; 30 from the Asia-Pacific region and 30 from the EMEA region.

Furthermore, the indexes focus on property investment firms as opposed to property development firms. This makes them a “purer” play on property, and also decreases the amount of exposure they have to emerging markets.

After all, the developing economies of the world are less developed by their very nature and, as a result, the large property firms in these countries generate much more revenue developing property than they do managing or maintaining it.

It’s perhaps the regional indexes of the Thomson Reuters series that are the most interesting.

I saw that because only one Europe-focused real estate ETF, the iShares FTSE EPRA/NAREIT Developed Europe Index Fund (IFEU - News), currently exist. Also, the only Asian real estate ETF on the market is the Guggenheim China Real Estate ETF (TAO - News) and, as its name suggests, it only focuses on Chinese real estate.

It remains to be seen just how different the Americas index will be from the laundry list of U.S.-focused real estate ETFs.


After all, the U.S. real estate market is the world’s largest and most liquid, and the U.S. is the main focal point of the Thomson Reuters index series. As it stands, all of the REITs in the Americas portfolio come from the U.S., although that could change over time.

The future inclusion of Mexican and Canadian REITs is no guarantee, but it will certainly add different exposure to the current lineup of real estate ETFs should an issuer choose to use the Thomson Reuters index.

The Asia-Pacific piece piques my interest most. The index should, in theory, provide blended exposure to a mix of developed and emerging markets that investors may crave.

In a perfect world, REITs in Singapore, Australia and Japan would combine with Chinese and Indian REITs to give investors exposure to the region’s property market in a way that isn’t yet available.

Compare that potential with Guggenheim’s TAO, which only offers exposure to China, and it’s clear the opportunity is there—if not the interest.

The problem is, thanks to the property investment mandate of the index series, the portfolio ends up being dominated by Japan and Australia. Hong Kong makes up nearly 23 percent of the index, but much of that property is located in Hong Kong, not mainland China. Singapore, another developed market, represents nearly 7 percent of the index.

The EMEA portfolio highlights this problem to a more drastic degree. This index, in the absence of country caps, is dominated by huge European REITs. Only two of the index’s 30 holdings, which are just 5.81 percent of the index, are in South Africa, and there’s no exposure to the Middle East.

As with the Asia-Pacific region, this may change over time as the property markets in the two developing regions mature. But, for now, it’s a Europe-centric index.

So while the news Thomson Reuters/Global Property Research global real estate indexes represent a real improvement over current offerings, they are still bound by the shackles of poor liquidity and choice in the emerging world. The intention is there, but the market is as of yet incapable of providing the means to effect a better strategy.

Would investors like to have the option of investing in emerging markets real estate? I’m sure they would. The problem is the developing world is busy trying to emerge.

Until that day comes, at least Thomson Reuters is trying to fill in the gaps.


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