Property Europe (EEE) : Into a range

The ETF BNP-Paribas EEE (Real Estate euro zone) created in 10/2015 in Euro and listed on Euronext seeks to replicate the index FTSE EPRA / NAREIT Eurozone Capped Net Total Return composed of 48 property values ​​of the Euro zone, of which approximately 63 % of German and French holdings.

The fees of this ETF are 0.4% and the AUM of approximately € 720m. Replication is physical and there is a dividend policy.

Alternative ETFs: MEH (Lyxor in Euro), EPRE (Amundi in Euro), EXI5 (iShares in Euro)

Index & components

The objective of the ETF BNP Paribas EEE is to replicate the performance of the FTSE EPRA / NAREIT Eurozone Capped Net Total Return index, which is composed of the main property values ​​representative of the listed real estate sector in the euro zone.

EEE is quite diversified, it is composed of 48 property stocks, of which 32% are German, 31% French and for the rest mainly Spanish (9.9%) and Belgians (8.7%). The top 10 stocks account for around 58% of the index's capitalization, and the top 3 hold about 27%: (Unibail-Rodamco 9.1%), Vonovia (8.7%) and Deutsche Wohnen (7.8%), with market capitalizations between € 13 and € 20bn.

The real estate sector is influenced by many factors, the most important of which is certainly the inflation / interest rate pair. A low rate environment not associated with deflation is very favorable for real estate companies who generally use leverage to buy assets and which are also yield values.

Large listed property companies often seek quality assets, which allow them greater visibility on revenues and a better valuation. The two most represented countries are Germany and France, which offer different but also interesting features. In Germany, the price of assets has risen a lot recently but is cheaper than in France with a high appreciation potential while the dynamism of the German economy is a real asset. Moreover, there is a delay in the construction of housing, compared to the demand that comes in support for prices, as in France. The regulatory framework (eg rent ceilings), taxation and demography are also important factors.

We can distinguish two main businesses for listed property companies, which are residential (eg Vonovia and Deutsche Wohnen) and commercial real estate (eg Unibail-Rodamco), which have different business models with generally better resilience for commercial real estate apart from severe crises. The scarcity of quality assets which restrains organic growth should lead to a consolidation of the sector, especially as the interest rate environment remains extremely favorable. There is also growing diversification in retirement home walls by some actors.

The European property sector remains promising, given the better prospects in the euro zone, particularly in France. However, it is important to pay attention to a possible change in monetary policy of the ECB which could lead to a new upward cycle on interest rates.

Latest developments

The EEE ETF posted a 6th consecutive annual increase in 2017 of 17.6% but has fallen by 3.7% since the beginning of 2018.

The real estate sector is very sensitive to rates and inflation expectations, and the sector was impacted by the theme of the rise in long-term rates in the US and higher expectations of inflation due to full employment, the dynamism of the world growth economy and the rebound of commodities, a move that eventually spread to Europe.

However, fears of a trade war that follow US protectionist actions now counterbalance the risk of overheating, which has allowed the real estate sector to rebound. The sector is also driven by a logic of consolidation, while Klepierre has just been denied an offer on Hammerson (UK) with a premium of 40% the latter judging the offer too low. This suggests that the sector retains strong growth potential beyond macroeconomic considerations and that consolidation is expected to accelerate in Europe.