Real estate ETFs: the easiest way to invest in “concrete gold”

Real estate has always been very popular with Swiss investors as an alternative asset class. However, the current media focus is primarily on the steady rise in real estate prices and the associated dream of home ownership for the Swiss middle class.

What is less well known is that real estate investments do not necessarily require a high level of capital and must represent a cluster risk. That’s why we want to focus on real estate ETFs in this article. We will show you why real estate ETFs can be an interesting investment for you, which products are on the Swiss market, what the high dividends are all about and what you should look out for before buying.

How can I invest in real estate at all?

First of all, a distinction should be made between direct and indirect real estate investments. We do not see owner-occupied residential property as a real estate investment, but rather associate it with a lifestyle decision. This is because, unlike an investment property, an owner-occupied home does not generate cash flow, nor is the focus on value growth.

Direct real estate investment (as an investment property)

With a direct real estate investment, you invest directly in one or more specific properties. This “concrete gold”, as real estate investments are also glorified, is usually financed by a combination of equity and a mortgage. However, financing can also take place using the crowdfunding method, whereby the property is divided among several investors. Examples of direct real estate investments are

• Apartment buildings
• Condominiums
• Single-family houses
• Commercial properties

Such a direct investment is often accompanied by the following aspects :

• Strong identification with the object(s)
• Direct interaction with tenants and tradesmen
• Large administrative effort (official formalities such as land register entry, property-specific tax settlement, coordination for tenant support and property maintenance)
• High capital investment
• Generally leverage effect due to high proportion of borrowed capital at currently low interest rates
• Extensive decision-making powers and development opportunities as (co-)owner (within the legal framework)
• Maturity of taxes on capital gains (in contrast to shares)
• Less transparent market and more difficult trading (and therefore subjectively fewer fluctuations in value)
• Cluster risk

As rational investors, we refrain from investing directly in investment properties due to the expense and cluster risk involved. In addition, we do not consider the sharp rise in real estate prices in metropolitan areas in recent years to be a law of nature. In the past, there have always been market phases in which individual properties in prime locations (“location, location, location”) were subject to strong fluctuations and suffered major falls in value.

Indirect real estate investment

With indirect real estate investments, the investor participates in real estate via a separate legal entity (e.g. via a fund). You do not become the owner of the property yourself, but you do participate in its performance.

The two most important indirect investment opportunities are:

• Real estate funds (incl. REITs)
• Real estate shares

Such indirect real estate investments are often associated with the opposite aspects than direct investments:

• No identification with specific real estate properties
• No direct interaction with tenants and tradesmen
• No/hardly any administrative effort
• No high capital investment required
• Generally no leverage effect (except by taking out a securities loan)
• No property-specific decision-making authority
• No real estate taxes
• Transparent market or simple trading (and therefore subjectively more fluctuations in value)
• No cluster risk

We only consider indirect real estate investments to be sensible if simple, transparent market access is ensured and a broadly diversified approach is also chosen.

In concrete terms, this means simply investing in numerous real estate companies in different countries and regions with one transaction via the stock exchange. And here we find the real estate ETF unbeatable as an investment vehicle.

What are real estate ETFs?

As we have already explained, a real estate ETF is an indirect real estate investment. Investments are made in an ETF. You can find a detailed description of this ingenious investment vehicle in our article “ETFs: the investment revolution”.

When you buy a real estate ETF, you invest exclusively in listed companies that belong to the real estate sector. This allows you to participate directly in their performance.

As with a “normal” or cross-sector ETF, a real estate ETF is also a passive investment based on an index.

The two most important index providers on which the real estate ETFs or their providers are based are FTSE Russel and S&P Global.

Real estate ETFs are mainly made up of real estate companies that operate on the market as so-called REITs .

What are REITs?

REITs (Real Estate Investment Trusts) were launched in the USA back in 1960 and have enjoyed great popularity among private investors ever since. The aim was, and still is, to give a wide range of investors easy access to real estate investments and thus regular income in the form of dividends.

REIT structures currently exist in around 20 countries, including the UK, Japan, Germany and France in addition to the USA. There is no legal basis for REITs in Switzerland.

REITs are tax-privileged, which is why they are also more strictly regulated than “normal” real estate companies. The most important features of REITs are

• Obligation to pay a minimum distribution of up to 90% of profits to shareholders
• Real estate as an investment focus
• Minimum spread of shares
• Additional country-specific requirements such as the exclusion of real estate trading and residential properties

There are three basic forms of REITs:

• Equity REITs that invest primarily in real estate for a wide variety of uses
• Mortgage REITs that invest primarily in real estate loans
• Hybrid REITs that invest in both

Who are real estate ETFs suitable for?

If you belong to at least one of the following groups, real estate ETFs are an option worth considering:

Dividend hunters: Real estate ETFs generally achieve a higher dividend yield than a market-neutral ETF (see this chapter). In addition to sector-specific reasons, regulatory requirements such as the aforementioned minimum payout ratio of up to 90% play a key role for REITs.

“Comfortable” people interested in real estate: There is undoubtedly something fascinating about real estate. We encounter it every day, whether at home and at work or at play, sport and culture. And we can’t avoid real estate in political discourse either. Just think of the omnipresent rental price debates, the differences of opinion on what constitutes good architecture, the shadows cast by high-rise buildings…. By investing in real estate ETFs, you participate indirectly in the income generated by properties with different uses, without having to deal with difficult tradesmen and/or troublesome tenants. It couldn’t be easier!

Rational investors: As indicated in the previous point, real estate ETFs eliminate both the interpersonal and property-specific emotions that are naturally possible with direct investments in “concrete gold”. However, this does not matter to rational investors. They simply add real estate shares to their portfolio because they hope to achieve a better risk/return ratio (see also this chapter).

What real estate ETFs are available on the Swiss market?

According to justetf.ch, 19 real estate ETFs are offered on the SIX Swiss Exchange as of November 12, 2021. Here are the most important facts:

• The vast majority (17) have UCITS authorization. This means that these ETFs are subject to minimum regulatory requirements for better investor protection, such as independent supervision or mandatory information requirements for investors.
• The vast majority (15) are distributing ETFs.
• Two ETFs, both from UBS, are limited to Swiss real estate. One invests only in real estate funds, the other additionally in listed real estate companies. These two products are the most expensive and the only ones that do not have UCITS approval.
• Although there are numerous REIT indices, no real estate ETFs are offered on the SIX Swiss Exchange that invest exclusively in REITs. In most cases, it is a combination of REITs and listed real estate companies without REIT status (Real Estate Operating Companies / REOCs), with REITs accounting for the lion’s share. We view this mix positively, as it diversifies the investment more broadly. By investing in REOCs, markets can be considered or adequately covered in which REITs are not permitted (e.g. in Switzerland) or only with strict conditions (e.g. Germany, where trading in residential properties is prohibited).

Comparison of supraregional real estate ETFs

Market overview Switzerland

Within the real estate ETFs, we consider the supra-regional ones to be the most attractive. This is because you are invested globally or at least in the most important industrialized countries with just one ETF.

In Figure 1, we have compared the five largest supra-regional ETFs (fund assets > CHF 100 million) available for purchase on the SIX Swiss Exchange.

It is striking that all ETFs are based on a different benchmark index. It is also unusual that the two global real estate ETFs, which focus on both developed and emerging markets, invest in a smaller number of companies than the other three ETFs (no. 3 – 5), which only cover the developed world (industrialized countries).

These three indices are the parent index “FTSE EPRA/NAREIT Developed Index” (No. 3) and the two more selective sub-indices “FTSE EPRA/NAREIT Developed Dividend+ Index” (No. 4 with a dividend focus) and “FTSE EPRA/Developed Green Index” (No. 5 with a sustainability focus on green building certification and energy use).

iShares raises the most money with its most expensive product

In terms of money raised, the iShares product (no. 4) is by far the most successful real estate ETF available on the Swiss stock exchange, with a fund volume of just under CHF 2 billion. CHF is by far the most successful real estate ETF available on the Swiss stock exchange. This is actually astonishing, as it is the most expensive with a TER of an impressive 0.59%. Many investors may find the underlying index, which focuses on companies with an expected dividend yield of at least 2%, attractive. However, the fact that this ETF was launched back in 2006 certainly also plays a role in the high fund volume.

Differences in performance and costs

In terms of performance over the past five years (including distributions), the ETF from the Dutch niche provider VanEck (no. 2) has been the most successful with an increase of around 33%. It is closely followed by the HSBC product (no. 3), which is the most broadly diversified in terms of the number of index components (376).

Positive: The cheapest supra-regional ETFs are available from a TER of just 0.25% (no. 2 + 5).

Credit Suisse back in the ETF business after strategy change

CS, which sold its ETF business to market leader BlackRock (provider of the iShares products) in 2013, has been offering its own ETFs again since 2020 following a change in strategy. This includes the real estate ETF launched in June 2020 (no. 5). It is the only product in our comparison that focuses on sustainability and reinvests dividends rather than distributing them.

Strong US dominance

Despite all the differences, the five ETFs analyzed have a strong US dominance (>50%) in common (see also section 7.2). This means that they do not differ from sector-neutral indices such as the MSCI ACWI or MSCI World, which have a similarly strong US weighting.

If this proportion is too high for you, you can switch to regional real estate ETFs, although the offering in Switzerland –in contrast to the USA – is very limited and the emerging markets are not currently covered.

Alternatively, it may be worth taking a look across the Atlantic. Numerous so-called “ex-US” ETFs are offered on the US stock exchanges. These cover the whole world without the USA. In combination with a US ETF, this ensures a global investment with an individual US weighting. Stefan chose this approach in 2016 and is invested in the following two real estate ETFs at the time of publication of this article:

• Vanguard Global ex-US Real Estate ETF (VNQI): ISIN US9220426764 / TER 0.12% / Nasdaq stock exchange (Note/disadvantage: As this ETF is domiciled in the US, there are additional tax expenses in connection with dividend reclaims; ETF is not offered by DEGIRO)
• iShares US Property Yield UCITS ETF (IUSP): ISIN IE00B1FZSF77 / TER 0.40% / Stock exchange e.g. SIX

Conclusion

All five ETFs examined above are established on the Swiss market and have positive unique selling points. The choice ultimately depends on your individual preferences. To help you decide, you could ask yourself the following questions:

• Global (No. 1 + 2) or only developed world (3 – 5)?
• Conventional (No. 1 – 4) or sustainable (No. 5)?
• Distributing (No. 1 – 4) or accumulating (No. 5)?
• Chargeable or free ETF (see partner offer below)?

– Partner Offer –

In our experience, “DEGIRO” is a particularly attractive broker for ETFs from a cost perspective. DEGIRO offers all five real estate ETFs listed above. Nos. 1, 2, 4 and 5 via the SIX Swiss Exchange. No. 2 and 4 even particularly favorable (core selection) via the Euronext Amsterdam (EAM) stock exchange. If you are interested, you can register with DEGIRO by clicking on the ad below, which will give you a trading credit of CHF 100 and support our blog at the same time.

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Profile of the “FTSE EPRA/NAREIT Developed Index”

In this section, we will take a closer look at the “FTSE EPRA/NAREIT Developed Index”, on which the previously presented HSBC ETF is based (see Figure 1, ETF No. 3). The other four indices have similar characteristics or do not deviate significantly from the following explanations.

Top 10 companies

Figure 2 shows the ten largest real estate companies in the index in terms of market capitalization or market capitalization. In total, they account for just under 24%, with the largest position at around 5%. We consider this to be an acceptable level in terms of diversification and potential cluster risk.

The sector leader and the company with the highest weighting in the index at around 5 percent is Prologisa global owner, operator and developer of logistics real estate. The US company Prologis is a REIT and, despite its global market leadership, is hardly known to the wider public. The following company portrait in the form of an (advertising) video outlines Prologis’ business model.

Country distribution: strong US dominance

As with sector-neutral indices, there is also a clear US dominance in the real estate sector (see Figure 3). US companies have a weighting of over 59% in the index under review, followed by Japan with just under 10%. The UK (4.72%) and Germany (3.49%) follow in third and fourth place.

Switzerland, with its seven real estate companies in the index, accounts for just 1 percent. The largest provider is Swiss Prime Site with a share of 0.4 percent.

The seven CH providers are listed below, sorted by index weighting (source: FTSE Russel from August 2021):

• Swiss Prime Site (0.4%)
• PSP Swiss Property (0.29%)
• Allreal Hld (0.15%)
• Mobimo (0.11%)
• Intershop I (0.02%)
• Peach Property Group AG (0.03%)
• Hiag Immobilien AG (0.02%)

Real estate sectors: Focus on REITs and commercial use

Figure 4 shows that REITs account for the lion’s share at around 84%. The rest are real estate companies without REIT status (see the first two positions in the table). These include, for example, all Swiss companies in the index (see Fig. 3).

Within the REITs, there is a broad spread in terms of use, with commercial use and commercial properties dominating. Investments in purely residential properties (“residential REITs”) are rather marginal at just under 15%.

High dividend yields possible with real estate ETFs

Real estate ETFs should be particularly interesting for dividend hunters. Compared to the sector-neutral market as a whole, dividends have been consistently higher over the past five years (see Figure 6).

The gray and blue curves show the dividend performance of two real estate indices, while the red curve refers to the overall market. All three indices are geared towards the developed world, i.e. excluding emerging markets.

However, it should be noted that the actual dividend distributed by the ETF is generally somewhat lower than Figure 6 suggests due to taxes (see also Figure 1).

Don’t underestimate the risks of real estate ETFs

Real estate ETFs can fluctuate significantly. On the one hand, this is due to the fact that they are traded on the stock exchange. On the other hand, they are heavily dependent on the economic situation, since – as we showed in chapter 7 – they are mainly commercial real estate.

The sometimes strong volatility was impressively demonstrated during the last pandemic-related stock market crash in 2020.

Figure 7 shows that the “FTSE EPRA Nareit Developed” real estate index has underperformed the market-neutral “FTSE Developed” index over the last five years. It is also noticeable that the pandemic-related price slump in 2020 was more pronounced and the subsequent recovery more hesitant than in the market as a whole.

Looking at a longer period, however, the performance picture is different.

Figure 8 shows the real price performance including distributions of the real estate ETF “iShares Developed Markets Property Yield” (based on the “FTSE EPRA Nareit Developed Dividend+” index) compared with the sector-neutral ETF “iShares Core MSCI World UCITS” (based on the “MSCI World Index”).

It is striking that the real estate ETF performed better from September 2009 to August 2016. Only then did the tide turn in favor of the sector-neutral index.

Better risk/return ratio thanks to low correlation with the overall market

Whether it makes sense to include real estate as an asset class depends not only on the expected long-term return but also on the extent to which real estate correlates with the market as a whole.

In this regard, we refer to Gerd Kommer, who we often quote, and who draws the following conclusion in his 5th edition of the standard work “Souverän investieren mit Indexfonds und ETFs”:

“In the 27 years from 1990 to 2016, the S&P Global REIT Index produced a higher return than the global equity market, as measured by the MSCI ACWI. The correlation between the two indices was pleasingly low at +0.66. All in all, adding a globally or at least Europe-wide diversified real estate component to a global portfolio seems worth considering.”

You can find out how you can structure your assets across different asset classes in our article “Asset allocation: the nuts and bolts of your investment”.

Conclusion

Compared to other real estate investments, we consider the purchase of real estate ETFs to be the most suitable investment. Simplicity, low costs, high liquidity, broad diversification and low capital commitment (no cluster risk) are strong arguments in favor of real estate ETFs.

Compared to investing in a global, cross-sector equity ETF, the above-mentioned advantages do not apply as unique selling points. However, due to the relatively low correlation to the overall market, we see the opportunity – in line with portfolio theory – to achieve a better risk/return ratio in the overall portfolio.

We are also positive on the supply side. There is now a sufficient, albeit not abundant, range of established, supra-regional real estate ETFs on the SIX Swiss Exchange at fair prices from a TER of 0.25%.

For the reasons outlined above, we consider real estate ETFs to be worth considering as an admixture (max. 20%) in a global, cross-sector equity (ETF) portfolio.

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Disclaimer

Disclaimer: Investing involves risks of loss. You must decide for yourself whether you want to bear these risks or not.

Errors excepted: We have written this article to the best of our knowledge and belief. Our aim is to provide you as a private investor with the most objective and meaningful financial information possible. However, should we have made any errors, forgotten important aspects and/or no longer have up-to-date information, we would be grateful if you could let us know.

Transparency note: At the time of publication, the Swiss Finance Blog team is invested in real estate ETFs from iShares and Vanguard. Apart from these investments, there are no business relationships (commissions or similar) with any of the index or ETF providers mentioned in this report.