Real Estate Eurozone (EEE) : The CBE effect!

The ETF BNP Easy EEE (Real Estate euro zone) created in 10/2015 is listed in Euro on Euronext and seeks to replicate the index FTSE EPRA / NAREIT Eurozone Capped Net Total Return composed of 49 property holdings of the Euro zone of which approximately 63% of German and French stocks.

The fees of this ETF are 0.5% and the AUM of approximately € 634m. Replication is physical and there is a dividend policy.

Alternative ETFs:  MEH (Lyxor, Euro), EPRE (Amundi, Euro), EXI5 (iShares, 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 stocks​​representative of the listed real estate sector in the euro zone.

EEE is quite diversified, it is composed of 49 real estate companies of which 32% are German, 31% French and for the rest mainly Spanish (10%), Belgian (9%) and Dutch (5%). The top 10 stocks account for about 58% of the index's capitalization, and the top 3 represent around 27%: (Unibail-Rodamco 10%), Vonovia (9%) and Deutsche Wohnen (8%), with market capitalizations of 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 interesting characteristics. 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 logics 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 a 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 EEA ETF has started its sixth consecutive annual increase and has increased by 10.1% since the beginning of 2017.

The real estate sector is very sensitive to ECB rates and guidance. It has just announced that the quantitative easing measures will decrease from € 60bn per month to € 30bn from March 2018 to September. The tone of the ECB remains accommodative and above all it signals that the pace of normalization will be very gradual and that a rate hike is not for tomorrow. The reaction was immediate on German 10-year yields, which fell to 0.42%. At the same time, European economic statistics are improving month after month (a record German IFO has just been published), which calls for a strengthening of economic growth in the Euro zone.

The growth momentum coupled with historically low rates, implies for the real estate sector an ever higher valuation of assets and a potentially high occupancy rate. The clarification of the ECB's monetary policy for the coming months clearly represents a positive point for the real estate sector in the Eurozone and provides good visibility.