iShares Property ETF Offers Liquid and Hands-Off US Property Investment Market Exposure
Property investment opportunities in the USA have been widely marketed in the UK over the past few years. The international financial crises of 2008 had a particularly significant impact on wide sections of US real estate. A highly leveraged pre-crises market saw foreclosures abound both in the residential and commercial property markets and prices plummet. The 10-city US property index, probably the best gauge of the overall market dropped by around 30%, New York prices lost 20% and Las Vegas saw up to 60% wiped off the value of property. The former two indices are still 20% off their 2007 peaks and the latter 45%. Many investors, including private individuals from the UK, bought into the US property market at or near its bottom and have ridden the recovery to significant profit, both in terms of ROI from rental returns and capital gains.
There still appears to be plenty of potential upswing left in the US property market recovery. The property market is one of the most popular investment classes and one that, as a general rule, many private investors feel more at ease with than the stock market and other non-tangible financial instruments. People understand owning a piece of property and consider it to be a safe, reliable long term investment. And in most cases traditional property investment is just that. If investors avoid risky mortgage levels, the completion risk of off-plan acquisitions, buying near to or at the apex of a ‘bubble’ and stay safe in terms of location, property should be a good solid, income yielding investment. Property markets have their ups and downs but long term, in politically and economically stable countries, conservative property investments do not tend to go too wrong.
However, as with any investment there are pluses and minuses to traditional property investment. Buying a property, even a cheap one, is a significant financial commitment with or without a mortgage and at least a five figure cash sum will ordinarily be required as a starting point. The process also requires a significant time commitment both during the purchase process and in finding a tenant both initially and in terms ongoing management. This can of course be outsourced but at the cost of a significant chunk of the rental income, impacting ROI. All of these issues, and the general risk, are magnified significantly when buying property abroad, meaning that even if a particular international property market is of interest to investors the barriers to entry often put people off taking the leap.
The new iShares US Real Estate ETF offers exposure to the US property market minus the requirement of either any hands-on commitment or larger sums. ETFs, or exchange traded funds, generally track indices which are made up of multiple firms in a particular industry, spreading the risk. As a result they even out the potential volatility of investing in the shares of one company and more closely mirror an industry sector as a whole.
The iShares ETF will track the MSCI USA IMI Liquid Real Estate Index made up of a wide selection of US REITs. REITs, or Real Estate Investment Trusts, own a portfolio of property, often commercial though there are also residential real estate REITs. REITs are required to invest a minimum of 75% in real estate assets and distribute at least 90% of taxable income to shareholders as dividends. The iShares MSCI Target US Real Estate UCITS ETF offers exposure to over 4000 properties across the US, including health care facilities, supermarkets and public storage and can be considered as a general play on the US real estate market. The MSCI USA IMI Liquid Real Estate Index is designed to limit volatility through a structure that give greater weighting to less volatile shares and also holding short-term, inflation-linked government bonds as a hedge against inflation. Although the ETF is listed on the London Stock Exchange, it is denominated in US dollars, which also means that the pound’s relative strength or weakness against the dollar will also impact ROI.
ETFs trade on stock exchanges in much the same way as the shares of a listed company, meaning that investors can buy into the ETF for as little as the price of a single share, which would currently be a little over $80. Investors can also sell holdings with the click of a button in the same way as selling normal company shares meaning ETFs are far more liquid than owning a piece of property in the traditional manner.
The downside to ETFs is that because they are structured to manage volatility and all property held by the REITs is actively managed, the returns will be unlikely to match those of a successful traditional property investment. However, over the past five years average returns from an investment in the index the iShares ETF tracks would have been 10.6%. Last year the index’s return was 4.1%. Another issue with ETFs is that because they are exchange traded, general stock market volatility will impact returns much more than with a traditional real estate investment.
Like any investment class or instrument ETFs have their strengths and weaknesses but when it comes to exposure to a particular property market abroad, they offer an accessible and comparatively lower risk, and certainly time commitment, to actually buying property abroad.