ETF Analysis - iShares International Developed Real Estate ETF (IFGL)

TLDR

1. It is a dollar investment fund that invests in real estate companies and REITs in developed countries except the United States.

2. Risk is not small due to high correlation with the stock market and high volatility.

3. Dividends are expected to grow at a CAGR of 5-10%.

Summary

This fund is a fund that invests in real estate-related industries and REITs in developed countries except the United States. The fund has about 207 assets, and the management fee is 0.48%. The benchmark is FTSE EPRA/NAREIT Developed Real Estate ex-US. Index and is a fund that tries to interlock with real estate index. Total asset size is USD 520 million, which is quite large.

As you can see in the picture above, the trend has been steadily rising after the sub-prime mortgage crisis of 2007 ~ 2008 swept the whole world. Benchmarks and tracking errors are fairly small, so it is not unreasonable to say that they are operated in conjunction with the index.

But where are they investing? Major assets are as follows.

Vonovia SE, which is the most owned, is the residential real estate management company of Germany with 355,000 real estate assets and its portfolio is 3 billion euro. It also manages 65,000 apartments.

Next is CK Asset Holdings Ltd., previously known as Cheung Kong Property Holdings Limited, which is a well-known investment company that specializes in real estate hard assets (completed real estate) management. The CEO of the CK Asset Holding Ltd. is famous Li Ka Shing. Another name for Cheung Kong is Yangtze River by the way. It is the largest real estate developer in Hong Kong and is also expanding its operations in mainland China. In addition, CK Asset Holdings Ltd. engaged in aircraft financing and aircraft leasing business. Since it is owned by Li Ka Shing, it is the biggest in Hong Kong. Enough said.

Mitsui Fudosan Ltd. was a clothing store opened in Nihonbashi by Mitsui Takatoshi, who made the Mitsui family in 1673, and entered the real estate business in 1914. It completed the Mitsui Building in 1928 and was listed on the stock market in 1949. In 1956, Mitsui Fudosan (Mitsui Real Estate) merged to become the current name. Since then, it has grown into a comprehensive real estate company that manages residential / leisure / office buildings. It has real estate business in major cities in developed countries around the world.

In addition, the fund is investing in similar types of real estate management companies and REITs, so it is reasonable to think that the fund is investing in not only the real estate but also in management capabilities.

The above figure is the ratio of the top countries invested, which are mostly developed countries such as Japan, Hong Kong, Australia and UK. In fact, Hong Kong is considered to be an indirect investment in mainland China by investing in a real estate company in Hong Kong. Japan is actually one of the most developed countries with the best cash flow in real estate business, and Britain is notorious for its high rental rates. Germany is a country where asset prices are cheap and the absolute value of rental is low, but steady profit comes in.

Interest Rates and Real Estate

If the interest rate rises, the price of real estate will generally go down. As the financing cost such as loans increases, the profit from real estate will be decreases relatively, so the real estate price is adjusted. If rent price rises with interest rates, the real estate prices will stay. However, interest rates are determined by the government while the rent price is determined by the market.

While interest rates are rising in most of the developed countries, the rate of future increases seems to be taken into consideration from 2017 to 2018 already. I do not think most of the interest rate will go up significantly, but profitability of real estate will surely decrease. The developed countries’ real estate market is not really soaring or falling like the real estate market in developing countries due to the fact that the prices are stabilized to some extent and the legal risks are relatively small. However, dividend income (monthly income) is not small compared to investment funds. So the real estate market in the US or other developed countries is attractive to create a stable cash flow.

The Fund is not a fund that invests in real estate with 100% cash. Since most of them are companies or REITs that use 50 ~ 90% leverage (loans or bonds) for financing, the Fund is about owning the equity only in real estate. It is the same concept because the individual will pay for the equity part of the house anyway.

So if you think that real estate will have little risk or volatility, I bet it is not true. The annualized volatility of the fund is about 12%, and since it is invested heavily in companies, the beta for the S&P 500 index is as high as 0.85. The fund is basically stocks and you can think of them as real estate like stocks. Just keep in mind that it is a fund that is different from the general real estate management we think.

Key Indicators

Of course, PB is close to 1(1.06), and PE is at 9.67, because the portfolio is focused in real estate managers and investment companies. That being said, we can expect annual profit to be about 10%. The fund pay dividends on a quarterly basis, but the dividend is mainly high at the end of the year, while the remainder is low. The annual dividend yield is just under 5% before tax.

In the case of profitable securities investing in real estate, a P/CF ratio is also required, which is about 16.04. The P/CF Ratio is calculated by dividing the price by the sum of the total cash flows per week per year. It is an indicator of how well you make cash.

Risk

1. Liquidity Risk

The total assets are USD 520 million, and the daily trading volume is less than USD 1 million. This may be a bit of a problem, but I think it is because of the nature of the fund, long-term holdings. Nevertheless, if the trading volume is only about USD 1 million, it is not easy to invest heavily.

2. Credit Risk

Most of them are invested in publicly traded stocks or listed REITs, so credit risk is relatively small in the fund itself.

3. Market Risk

Risk is high depending on the real estate market or stock market. It is a fund that can fall even if the real estate market is bad or the stock market is bad. However, the fund can benefit from low interest rate or good stock market even if the real estate market is bad. It can be an investment of ambiguous identity, which is neither a real estate nor a company investment Due to its characteristics, the fund is advantageous that dividend yield is higher than that of general companies, and that the credibility of the assets held by the company is very high.

Also, the currency risk is very high. There is no dollar asset; however, because the fund's profit and loss can be dominated by the dollar exchange rate. The dollar index must be monitored consistently because the Fund buys all the assets in dollars and hold them in foreign currencies. However, since the recent trend is depreciation of the US dollar, we can expect a favorable profit from exchange rate. However, Japan, which succeeded in weakening yen, is a trap. Below is the dollar index trend, but the dollar index rebounded recently due to issues here and there.

The other risk is interest rates, which is actually quite huge. However, most of the assets are invested in Europe and Japan, and the risk of interest rate hikes is limited. Japan is basically zero interest rate, and Europe is minus interest rate. Personally, I believe the European economic recovery is still far away. Below is the 10-year Japan Treasury yield. The interest rate is basically zero. Borrow money for free and invested in Japanese real estate and raising the rental rate by 5~6%! Not bad! However, the price of Japanese real estate does not increase much, because what happened in the Japanese bubble economy.

4. Political Risk

The Fund invests in many countries and there are many companies and REITs that are directly influenced by real estate and financial regulations. Thus, in some of the countries where funds are invested throughout the year, regulatory risks may persist. However, if this fund is a fund investing in real estate in developing countries, the risk premium should be significantly increased due to political risks. However, since the Fund invests in developed countries, it may not be hit by sudden non-sense regulations or policies. Therefore, political risk seems to be quite limited.

Conclusion

When we invest in dollars, we are actually in a situation like a blind touching elephants. Well, I live in Korea and at least that is why I feel it that way probably. Overseas investment is not that easy. In particular, there is little or no answer to law or general practice. Even if you are well-versed in the economy, if you do not know the local trading environment, it can be very dangerous. Even in the case of real estate investment, direct investment in real estate is incredibly difficult, and each mistake leads to the loss of big money. Therefore, if there is a desire for investment in overseas real estate, indirect investment is a better option than general direct investment. This fund is basically the same as stocks, but it is a good choice for those who want to start investing in overseas real estate safely because they can get a good payout and net asset value even in the worst case. Of course it is my personal idea.

Closing

The following is a stock / index ticker for the people who wants to check it out.

Security Code : IFGL

CUSIP 464288489

Bloomberg Index Ticker : TRGXUU