The three iShares funds with "yield" in their names all track versions of the FTSE EPRA/NAREIT indices that overweight higher-yielding companies, which explains their relatively high income levels within this sample. The other indices offer generally slightly lower, but still substantial yield levels. 

However, as we have seen frequently during the bear market, dividends can be cut, and the stocks that make up these indices bear close examination to see if payout levels are sustainable. Those REITs within the indices that have used high leverage are particularly vulnerable to dividend cuts.

In fact, according to the ETF issuers I spoke to, investors are still, on balance, redeeming property ETFs, and this indeed reflects expectations that such yield levels will not be maintained. The global recession, combined with high levels of property vacancies, is already forcing rental income, and the dividends from property companies, down.

Nevertheless some metrics make REITs look relatively good value. US advisory firm Green Street recently pointed out that equity REIT yields are at their highest level since 1990, and that REITs are at their cheapest valuation, relative to corporate bond yields, since 1993.

According to Nizam Hamid, head of sales strategy at iShares in London, there were significant outflows from property ETFs in the third quarter of last year, although more recently client flows have been very subdued, with few major purchases or redemptions. Lindia Min of Paris-based EasyETF, the other major ETF issuer covering the property sector, also noted that the predominantly institutional clients who invest in these funds are still, on balance, net sellers.

With European property ETFs offering a choice between two index compilers—FTSE EPRA/NAREIT and DJ Stoxx—it's worth being aware of some subtle differences in coverage. Hamid of iShares, which offers property ETFs based on both index versions, noted that the FTSE indices offer exposure to a wider variety of property companies, in particular to the "tail" of smaller-capitalisation stocks within the sector. 

This observation is borne out by an examination of the two index compilers' broad Europe benchmarks. The FTSE EPRA NAREIT Europe Index allocates around a 50% cumulative weighting to its largest ten component stocks, with the largest constituent, the French REIT Unibail-Rodamco, representing around 11% of the index. The DJ Stoxx 600 Real Estate Index, tracked by iShares and Comstage ETFs, has an 82% weighting in its top ten stocks, with Unibail-Rodamco allocated a 29% share.

Differentiation Challenges 

While the available property ETFs allow European investors to build a diversified portfolio by geographical region—there are funds tracking Eurozone, European, UK, Asia-Pacific (though this index is heavily skewed towards Australia), and North American property companies, as well as two global ETFs—there are as yet no European ETFs allowing investors to differentiate between different subsectors of the property market, as exist in the US (which has funds tracking the industrial/office, mortgage, residential and retail sectors). So it's up to investors to take a detailed view of the relevant benchmarks and to see what underlying exposures the indices contain.

An investor's view of the sector came from Christopher Aldous of Evercore Pan-Asset Capital Management Ltd. The fact that ETFs track listed property companies means that the price movements that investors will experience are likely to be completely different than those generated by a more traditional fund investing in physical property, said Aldous. 

ETFs are likely to move earlier, and faster in price, than the traditional vehicles, he explained, something evident in the price declines experienced by property ETFs in early 2007, well before traditional property funds had started to adjust their net asset values. 

Conversely, property ETFs are likely to bottom out in price terms earlier than other property funds when the cycle turns. While Evercore still retains a broadly negative view on the real estate sector, reflecting the continuing excess of supply over demand, it expects the US market to be the first to bottom—though not yet.

Hamid of iShares explained that, in his firm's view, property ETFs remain a liquid and transparent way of gaining access to the sector, with the alternatives—for example, Eurex's recently-launched property futures—less easy for investors to understand.

In summary, listed property ETFs have suffered badly from the bear market, with severe price declines in fund prices and a major shrinkage in assets under management. However, the expansion of the REIT universe over recent years, particularly in Europe, offers an increasingly uniform structure for property investment. 

The listed property vehicles included in benchmark indices can be quite diverse, so it's worth doing some homework into geographical and sector exposures. Once the real estate cycle turns, as at some point it will, expect property ETFs to be an efficient and transparent way of gaining exposure to the upturn.

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