Real Estate and ETFs

A few weeks back, Canadian Investment Review hosted its first ever Real Estate Summit, a forum for plan sponsors to discuss trends and opportunities in the asset class. Right now, for many sponsors of DB pension plans, real estate is a golden opportunity. It’s inflation-sensitive and long-term – which make it a perfect fit in a pension portfolio. Unless of course you’re a smaller plan, and then access gets a little trickier. While Canada’s biggest pension funds hold direct investments in high profile real estate around the world, smaller plans are on the hunt for funds and other entry-level ways to access the market.

Call them institutional property virgins if you will (minus the perky HGTV host and hunger for pot lights and granite countertops).

For these investors, REIT ETFs offer a compelling story and some insight into the market. They certainly enjoyed a healthy run at the beginning of 2012. However, their performance since is a mirror for where the overall real estate space could be headed, especially as the global economic outlook darkens as we head into summer. Indeed, with growing economic and job uncertainty, performance of REIT ETFs has been on the decline according to Institutional Investor, which notes that:

The FTSE Nareit All REITs Index, which includes all types of commercial properties, had a 2012 year-to-date total return (including dividends) of 9.02 percent on May 31, while the 50 more frequently traded REITs tracked by the FTSE Nareit Real Estate 50 Index had a total return of 8.54 percent. The iShares ETF FTSE Nareit Real Estate 50 Index Fund (NYSE: FTY) holding those same 50 REITs returned 8.31 percent for that period.

Without job growth, experts argue, it’s hard for REITs to book the steep price gains of years past. That is because a majority hold commercial real estate used for industrial, office, retail or residential uses, all of which are highly vulnerable to changes in employment, manufacturing or consumer spending.

Companies are also renting less space – another big trend that can dampen growth in this sector.

But it’s not all bad news and there are still plenty of opportunities: manufacturing has been turning around and REITs that own industrial space have had strong performance as a result. Apartments are also another good area as people make the choice to rent instead of owning and as the boomer generation sells their homes and opts to move into rentals.

So as pension funds mull over potential exposure to real estate, performance in the REIT ETF space offers some insights and data — and also a potential liquidity sleeve or portfolio completion strategy for those plan sponsors looking to make their investments soon.