Income seekers have been targeting property funds to take advantage of high yields at relatively low risk. But with the majority of property investment trusts trading at eye-watering premiums, you might want to diversify your exposure to the asset class with a low-cost exchange traded fund (ETF).
- Low cost
- Good level of income
- Broad exposure to developed market property
- Correlated to equity market returns
In the scramble for yield, investors have flocked to property investment trusts such as F&C Commercial Property (FCPT) and UK Commercial Property Trust (UKCM), both members of the IC Top 100 Funds. But FCPT's shares are now trading at a 14.7 per cent premium to the trust's underlying net asset value (NAV) and UKCM's shares are at a 6 per cent premium, making them less appealing despite their high yields.
iShares Developed Markets Property Yield UCITS ETF (IWDP) offers broad exposure to real estate investment companies (Reits) with a good income streams. The product offers a solid yield at a reasonable price tag and, unlike a closed-ended fund, you don't have to pay more for its shares than the underlying assets are worth.
We're not comparing apples and apples here, though. You do lose some of the benefits of bricks and mortar diversification with property ETFs. They do not behave in the same way as closed-ended vehicles as they invest in Reits traded on the stock market rather then investing directly in illiquid property assets. This means that your returns are more correlated to equity market movements than property funds, which tend to offer returns that differ widely from other segments of the market. It also means that the underlying assets trade at discounts and premiums, which could impact returns.
That can mean that in the short term the index might be more volatile than other property funds. Adam Laird, head of passive fund investments at Hargreaves Lansdown, says: "Property ETFs are interesting investments but you do need to be aware of what you're investing in. Even if property prices hold stable you might find yourself taking short-term losses but in the long run you'd hope that the returns would be similar to property."
iShares Developed Markets Property Yield tracks the FTSE EPRA/NAREIT Developed Dividend+ Index. It offers global exposure to Reits and listed real estate companies in developed economies, excluding Greece, with a one-year forecast dividend yield of at least 2 per cent. At 0.59 per cent it carries a lower ongoing charge than closed-ended structures investing only in UK real estate and also tracks the performance of some of the largest real estate companies in the world.
The ETF's benchmark is heavily biased towards the US, which comprises 50-55 per cent of the index but covers 270 investment companies, meaning it is diversified. The geographic exposure will be another another pull for investors who want to diversify out of UK-focused commercial property investment trusts. The ETF's biggest holding is American commercial REIT Simon Property (US: SPG), followed by self storage company Public Storage (US: PSA).
Because the ETF has a mandate to target dividends over 2 per cent, it has a current distribution yield of 3.01 per cent. That is lower than UKCM's 4.14 per cent yield but higher than comparable ETFs without an income focus.
Last year the fund returned 19.96 per cent in dollar terms and 27.41 per cent in sterling terms, following the previous calendar year when share price fell -0.47 per cent in dollars. In that time the ETF has closely tracked its benchmark.
IWDP comes with the benefit of using physical replication and is much larger than rivals, making it more liquid. It also has a higher yield than most similar funds. At an ongoing charge of 0.59 per cent it carries a slightly higher cost than similar products but many are not physically replicating or are much smaller, impacting liquidity. That fee compares with the ongoing charge of 1.14 per cent for F&C Commercial Property.
| IC Tip rating | |
| Tip style | Income |
| Risk rating | Medium |
| Timescale | Long term |
iShares Developed Markets Property Yield UCITS ETF (IWDP) | |||
| PRICE: | 1,614.25¢ | BASE CURRENCY: | Dollar |
| TOTAL ASSETS: | $2,956.87 | TOTAL EXPENSE RATIO: | 0.59% |
| LAUNCH DATE: | 20 October 2006 | YIELD: | 3.03% |
| INDEX: | FTSE EPRA/NAREIT Developed Dividend+ | MORE DETAILS: | iShares.co.uk |
| REPLICATION METHOD: | Physical | ||
Source: Morningstar, as at 26 May 2015
Total share price return (%) in GBP
| 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | |
| iShares Developed Markets Property Yield UCITS ETF | 3.5 | 27.4 | -2.3 | 17.8 | -1.6 | 24.9 |
| FTSE EPRA/NAREIT Developed Dividend+ | 2.6 | 28.7 | -1.2 | 19.0 | -0.4 | 26.5 |
Source: FE Trustnet as at 26 May 2015.
Top 10 holdings
| Holding | % |
| Simon Property REIT | 5.1 |
| Public Storage REIT | 2.5 |
| Equity Residential REIT | 2.3 |
| Sun Hung Kai Properties | 2.3 |
| Unibail-Rodamco SE REIT | 2.2 |
| Health care REIT | 2.1 |
| Ventas REIT Inc | 2.0 |
| Avalonbay Communities REIT Inc | 1.9 |
| Prologis REIT Inc | 1.8 |
| Boston Properties REIC Inc | 1.8 |
Source: iShares as at 26 May 2015
Geographic allocation
| Country | % |
| US | 56.1 |
| Hong Kong | 8.2 |
| Australia | 6.8 |
| Japan | 6.2 |
| UK | 5.2 |
| France | 4.0 |
| Canada | 3.5 |
| Singapore | 2.6 |
| Germany | 2.6 |
| Other | 4.2 |
Source: iShares as at 26 May 2015
