The objective of the ETF BNP Paribas EEA is to replicate the performance of the FTSE EPRA/NAREIT Eurozone Capped Net Total return index, composed of the main real estate companies of the european sector listed in the eurozone.
This ETF is managed in physical replication and its expenses are 0.50%, the Fund's liquidity is rather high for a European ETF, at 456 M €. Dividends are distributed, but there is a version with the dividends capitalized (EEA).
EEA is fairly diversified, it consists of 49 properties of which 33% are German, 29% French, and for the remaining Spanish (9%), Belgium (8%) and Dutch (5%). The top 10 stocks represent approximately 58% of the index capitalisation, and the top 3% of the index is: (Unibail-Rodamco 10%), Vonovia (9%) and Deutsche Wohnen (8%), with market capitalisations ranging from 13 to 23 Bn €.
The Index started its sixth consecutive annual increase and grew by 11.6% since the beginning of 2017. The property sector is influenced by many factors, the most important of which is the inflation/interest rate. A low interest rate environment that is not associated with deflation is very favourable to the properties that typically uses leverage to buy assets and which are in addition usually offering significant yield to their shareholders. Large listed REITs often seek quality assets, allowing them to gain greater visibility on income and better valuation. The two most represented countries are Germany and France, which offer different but interesting characteristics. In Germany, asset prices have risen significantly but are less expensive than in France, with strong upside potential, while the dynamism of the German economy is a real asset. Moreover, there is a delay in housing construction, compared to the demand which support prices, as in France.
The regulatory framework (e.g. rental CAP), taxation and demographics are also important factors. There are two main business lines for listed property companies, residential (e.g. Vonovia and Deutsche Wohnen) and commercial real estate (e.g. Unibail-Rodamco), which have different logic with generally greater resilience for commercial property outside of severe crises. The scarcity of quality assets that offset organic growth should lead to consolidation in the sector, especially as the rate environment remains extremely favourable. There is also a growing diversification in the nursery assets of some of the players. The European property sector remains promising, due to the better outlook in the Eurozone, supported by the election of Emmanuel Macron.
However, it is important to keep attention to a possible change in the ECB monetary policy that could result in a new cycle of rising rates.
