Global Real Estate Securities Benchmarks: 2013 Update

Transcription

1 PREI PRUDENTIAL REAL ESTATE INVESTORS Global Real Estate Securities Benchmarks: 2013 Update MARCH 2013 ABU DHABI ATLANTA BEIJING CHICAGO FRANKFURT HONG KONG ISTANBUL LISBON LONDON LUXEMBOURG MADISON MEXICO CITY MIAMI MILAN MUNICH Grace Bucchianeri, PhD Paul Fiorilla Marc Halle NEW YORK PARIS SAN FRANCISCO SAO PAULO SEOUL SINGAPORE SYDNEY TOKYO

2 Executive Summary Data on global public real estate securities is produced by two major sources: the Developed Property Index and the Developed Real Estate Index Series. This report looks at the composition, performance and risk-return characteristics of these indexes, focusing on the developed market sub-indexes of the two broad families. Both indexes have grown rapidly over the past decade as the real estate securities sector has become more accepted among investors. The United States is by far the largest country of origin, representing about 45% of both indexes. By region, North America is slightly larger than Asia- Pacific. The indexes cover many of the same companies in the same markets. However, s index has less-stringent size requirements, which enables it to cover about 50% more companies based on its eligibility criteria. This creates the biggest impact in Asia, where covers more than twice as many real estate firms as FTSE. Another notable difference between the two indices comes from the coverage of small and mid-cap companies. More than 350 small- and mid-cap stocks are represented in the index, compared to 232 in the FTSE index. Small and mid-cap companies have generally outperformed larger-cap companies over the past decade. This is demonstrated when calculating returns based on the number of stocks, as opposed to weighing by value, which has produced higher returns in nine out of 11 years since Snapshot of the Indexes The Developed Property Index is a subset of the Global Property Index, which is comprised of public real estate firms that are included in the Global Broad Market Index (BMI). The Developed Real Estate Index (the acronyms stand for the Financial Times London Stock Exchange, the European Public Real Estate Association and the US-based National Association of Real Estate Investment Trusts) is a subset of the Global Real Estate Index family. The FTSE index tracks companies in the developed markets of the Americas, Asia and EMEA (Europe, Middle East and Africa). Both and FTSE also produce sub-indexes of public real estate firms in emerging countries, which we will not consider here. EXHIBIT 1 provides a snapshot of the two benchmarks that are compared in this report. The index covers more companies with a greater market capitalization than the FTSE index. The value of companies in the index as of year-end 2012 was $1.4 trillion, as opposed to $1.2 trillion for the FTSE index. covered 450 stocks, about 50% more than the 303 covered by the FTSE. The index covers a larger number of small- and medium-sized real estate companies that are excluded from the FTSE index, which has more stringent eligibility criteria in terms of size. The FTSE index encompasses firms in two countries China and Greece that are not covered by. On the flip side, covers Bermuda while the FTSE does not. Both the indexes are free-float adjusted and have size and liquidity screens, which we will examine in more detail in the next section. 1

3 and FTSE are not the only indexes of global real estate securities. Others include the Global Property Research (GPR) 250 REIT Index, UBS Global Real Estate Index, Dow Jones Global Select Real Estate Securities Index, Dow Jones Global Select REIT Index and the Thomson Reuters Datastream Real Estate Investment Trust Index. We focus on the and FTSE indexes in this report because they have the broadest geographical coverage and they are the most widely used within the industry. 1) SNAPSHOT OF THE INDEXES Description Developed Property Index Represents the developed markets portion of the Global Property Index Developed Real Estate Part of Global Real Estate Index series Companies Publicly traded companies engaged in real estate ownership, development, property management, rental and investment Listed real estate stocks involved in ownership, trading and development of income-producing real estate Base Date Dec. 31, 1992 = 100 Dec. 31, 1999 = 1000 Market Cap (US$Bil) 1,349 1,243 Number of Stocks Number of Countries Investability Free-float adjusted, liquidity and size Free-float adjusted, liquidity and size screened screened Exchange Rate WM/Reuters mid-market fixings WM/Reuters closing spot rates Source: Factset, FTSE,, Prudential Real Estate Investors Research. As of Dec. 31, 2012 Eligibility and General Characteristics Relevant Activities: The index is designed to capture a wide range of stocks in the markets it covers. Companies in the index must generate 75% or more of their revenue from equity property-related activities. Revenue from debt and hybrid properties is excluded. At least 60% of revenue must be derived from property or real estate related activities such as development, property management, rental and/or investment in physical properties. To be eligible for the index, a company must have derived in the previous year at least 75% of its earnings before interest, taxes, depreciation and amortization (EBITDA) from the ownership, trading and development of income-producing real estate. Construction of residential for-sale units is considered relevant activity for inclusion in the index in Asia but nowhere else. Only companies that produce an audited annual report in English are eligible (EXHIBIT 2). 2

4 2) ELIGIBILITY CRITERIA Minimum market capitalization Liquidity Domicile Real estate activities Property sectors Float-adjusted market cap of at least US$100 million Minimum value traded of US$50 million for last 12 months Factors include country of incorporation, primary exchange, liquidity, geographic location of assets and headquarters of the company 60% or more revenue must come from real estate-related activities such as development, management, rental and/or investment Diversified, hotel/resort & entertainment, industrial, office, healthcare, retail, storage, specialty and residential Investable market cap greater than or equal to size thresholds of regional indexes: 0.10% in North America and Europe and 0.30% in Asia Median daily trade per month at least 0.04% of shares in issue for more than 4 of the prior 12 months Usually country of listing where it is most liquid. Other factors may include investor protection regulations, tax residence, market perception and currency of trading 75% of total EBITDA from relevant real estate activities (include construction of residential home for sale in Asia only) Healthcare, self storage, industrial, office, industrial/office mixed, residential, retail, lodging/resorts, specialty and diversified Source: Factset, FTSE,, Prudential Real Estate Investors Research. As of Dec. 31, 2012 Market Capitalization: Shares of both indexes are updated on a quarterly basis in March, June, September and December. To be included in the index, companies must have a float-adjusted market capitalization of at least US$100 million. Companies whose market cap drops below US$75 million will be deleted from the index at the annual reconstitution date, which falls at the end of September. However, companies can be removed from the index at any time during the year if the market cap drops below US$25 million, subject to a five-day notice period. The FTSE index includes companies with a market cap equal to or greater than 0.10% of the broader regional index in North America and EMEA or 0.30% of the broader Asian index. Companies that meet the criteria are eligible to join each quarter. Companies can be removed from the index if their market cap falls below 0.05% of the value of the broader index in North America or EMEA, or 0.15% of the broader Asia index. Liquidity: Both indexes screen for liquidity. All companies in the index must have had at least US$50 million of shares traded in the 12 months preceding the annual reconstitution date. Stocks will be dropped if they generate less than US$35 million of shares traded in the trailing 12 months. The liquidity criteria in the FTSE index is based on the median daily trading per month. To be eligible for inclusion, a company s median daily trading per month must reach 0.05% of its investable shares in 10 of the 12 months prior to an annual screening in March. Existing companies will be dropped if less than 0.04% of their shares are traded for more than four of the 12 months prior to the annual review. 3

5 Initial Public Offerings (IPOs): Additions to both indexes via IPO are considered quarterly. Companies formed through an IPO must meet size requirements and demonstrate at least one month of sufficient liquidity to be eligible for inclusion in the index. However, if the property IPO is among the top five largest companies in its country of domicile by market cap, the 30-day trading rule may be waived. The FTSE index contains a similar rule when newly formed companies have a market cap greater than or equal to the regional index of 0.15% in North America, 0.20% in the EMEA and 0.40% in Asia. Domicile: For purposes of domicile, the country of incorporation or registration is the primary factor considered by Index. Other factors include headquarters location, stock exchange primary listing, opinions of security analysts and investors, geographic sources of revenues, and location of fixed assets or employees. The primary criterion used by FTSE is the country of listing. Other factors considered by FTSE include the company s investor protection policies, the country in which the company is housed for tax purposes, market perception and currency of trading. Property Sectors: The property sectors included in index are diversified, hotel/resort & entertainment, industrial, office, health care, retail, self-storage, specialty and residential. Companies are classified on the segment which produces 60% or more of revenue. The FTSE index includes categories for health care, selfstorage, industrial, office, industrial/office mixed, residential, retail, lodging/resorts, specialty and diversified. FTSE s classifications are based property value. Companies are divided by which segment encompasses 75% or more of the gross book value in a particular property sector. If a company has no property type that encompasses 75% of book value, then it is listed in the mixed sector. Calculation Methodology: The float-adjusted, market cap-weighted index is calculated daily by means of the divisor methodology which is used for all indexes. The index value equals the index market value divided by the index s divisor. The index market value is the price of each stock in the index multiplied by the number of shares used in the index calculation and summed across all the stocks in the index. The divisor represents the initial market value and is adjusted to reflect changes in shares outstanding, capital actions, addition or deletion of stocks to the index. Price returns, total returns and net returns are available in six currencies: the Australian dollar, Canadian dollar, euro, pound, yen and US dollar. WM/Reuters foreign exchange rates are taken daily at 4 p.m. Greenwich Mean Time, with the mid-market fixings used in the calculations. Dividends are included in the gross and net total return calculations based on their ex-dates. Net return calculations reflect the return to an investor who reinvests dividends after the deduction of a withholding tax. The FTSE index s main currency is the euro, although the index is also calculated in the US dollar, pound and yen on an end-of-day basis. The exchange rates used are WM/Reuters closing spot prices collected at 4 p.m. London time. The index is calculated using a chained methodology. Capital returns, gross total returns and net total returns are available on a daily basis. Market Size and Historical Growth Market Size: Real estate securities around the globe have grown rapidly during the past decade, with the total size of both the and FTSE indexes growing substantially (EXHIBIT 3). The index grew to $1.1 trillion by year-end 2012 from $66 billion in The FTSE index increased in total market cap to $1 trillion in 2012 from $107 billion in

6 3) GROWTH OF GLOBAL REAL ESTATE SECURITIES (MARKET CAP $US BIL) $1,200 $1,000 $800 $600 $400 $200 $ DEVELOPED RE DEVELOPED PROPERTY Source: Factset, FTSE,, Prudential Real Estate Investors Research, as of Dec. 31, 2012 Both indexes have also grown in the number of stocks (EXHIBIT 4). At year-end 2012, the index contained 450 stocks, up from 172 in The FTSE index has grown to 303 stocks from 247 at its launch date in January Historical FTSE data was generated going back to 1990 using the stocks of companies that qualified for the index on the launch date. 4) GROWTH OF GLOBAL REAL ESTATE COMPANIES DEVELOPED RE DEVELOPED PROPERTY Source: Factset, FTSE,, Prudential Real Estate Investors Research, as of Dec. 31, 2012 The average company size has grown considerably for both indexes (EXHIBIT 5). In 1990, companies averaged $386 million of market cap in the index and $434 million in the FTSE index. By the end of 2012, the average company size had grown to $2.5 billion in the index and $3.4 billion in FTSE. In stock market parlance, the real estate securities grew from being small cap to mid cap. This growth is due to both the appreciation of underlying real estate properties as well as the acceptance and increasing demand for real estate securities. 1 1 Global Securitized Real Estate Benchmarks and Performance, Camilo Serrano and Martin Hoesli, Journal of Real Estate Portfolio Management, Jan-Mar

7 5) GROWTH IN AVERAGE COMPANY SIZE $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $ DEVELOPED RE DEVELOPED PROPERTY Source: Factset, FTSE,, Prudential Real Estate Investors Research. As of Dec. 31, 2012 The difference in average market cap highlights the impact of the eligibility criteria. Globally, the FTSE index s average market cap is 36% higher than the index. The discrepancy is largely a product of the coverage in the Asia-Pacific region, where the index encompasses 158 companies with $587.8 billion of market cap (average: $3.7 billion), and the FTSE index includes only 76 companies with $497.7 billion of market cap (average: $6.5 billion). The index provides access to a large number of small-cap real estate firms in Asia. The difference between the indexes is much smaller in other regions. In North America, covers 163 firms with $557.3 billion of market cap (average: $3.4 billion), while FTSE tracks 135 firms with $534.1 billion of market cap (average: $4 billion). In Europe, covers 87 firms with $178 billion of market cap (average: $2.1 billion), while FTSE covers 83 firms with $166.7 billion of market cap (average: $2 billion). Both indexes cover a small number of firms in other regions. Regional Distribution: In terms of regional and country distribution, the indexes are quite similar (EXHIBIT 6). The index is slightly more concentrated in Asia Pacific and slightly less concentrated in North America compared to the FTSE index. Europe s share is the same in both indexes. 6

8 6) BREAKDOWN OF GLOBAL REAL ESTATE SECURITIES BY REGION Asia Pacific 36% Asia Pacific 39% North America 50% Europe 14% North America 47% Europe 14% Source: Factset, Prudential Real Estate Investors Research. As of Dec. 31, 2012 Country Distribution: The country concentration of the two indexes is also similar (EXHIBIT 7). At the end of 2012, the US (44%), Japan (15%), Hong Kong (11%), Australia (8%) and Singapore (5%) produced the top country concentrations in the index, while the largest country concentrations in the FTSE index were the US (45%), Hong Kong (12%), Japan (11%), Australia (8%) and Canada (5%). Countries with the greatest differential were: Japan, which comprises 11% of the FTSE index and 15% of the index, and Canada, which comprises 5% of FTSE and 3% of. 7) COUNTRY DISTRIBUTION OF GLOBAL REAL ESTATE SECURITIES Germany 1% Sweden Switz. 1% France 4% UK 5% Singapore 5% Canada 5% 1% Others 2% United States 45% Switz. 1% Germany Canada 1% Sweden 1% 3% France 4% UK 5% Singapore 5% Australia 8% Others 3% United States 44% Australia 8% Japan 11% Hong Kong 12% Hong Kong 11% Japan 15% Source: Factset, Prudential Real Estate Investors Research. As of Dec. 31,

9 Performance Monthly Returns and Volatilities: Although there are some differences in the methodology and construction, the two indexes are highly correlated (EXHIBIT 8). The FTSE index has had a slightly higher return and slightly more volatility than the index. Between 1991 and 2012, the average dollar-denominated monthly total return for the index was 0.84% as compared to 0.90% for the FTSE index. Meanwhile, the volatility of the index was 5.29% versus 5.37% for the FTSE index. 8) PERFORMANCE SUMMARY BASED ON TOTAL RETURNS ( ) Mean 0.90% 0.84% Standard Deviation 5.37% 5.29% Minimum % % Month Occurred Oct-08 Oct-08 Maximum 20.66% 20.47% Month Occurred Apr-09 Apr-09 Correlation 0.99 Source: Morningstar, FTSE,, Prudential Real Estate Investors Research. As of Dec. 31, 2012 The highly synchronized returns of the two indexes can be seen in EXHIBIT 9, which is a time series depiction of monthly total returns. 9) SIMILARITY IN TOTAL RETURNS 30% 20% 10% 0% -10% -20% -30% Source: Morningstar, FTSE,, Prudential Real Estate Investors Research. As of Dec. 31,

10 If we look beyond the global picture, however, we will find differences in regional returns (EXHIBIT 10). Returns for North America are the most similar because the universe of REITs that comprise the index in that region is nearly identical. Since North America is the biggest component of the global index, global returns of the two indexes are highly correlated. But there is a bigger disparity in the performances of the indexes in Europe and Asia Pacific. 10) HISTORICAL ANNUALIZED RETURNS BY REGION World North America Asia-Pacific Europe 1-Year 27.6% 16.8% 44.9% 30.0% FTSE 3-Year 12.4% 16.6% 10.5% 7.3% EPRA/NAREIT 5-Year 0.0% 3.6% -2.2% -3.0% 10-Year 10.8% 10.2% 12.4% 10.2% 1-Year 28.9% 18.4% 43.3% 31.3% 3-Year 14.0% 17.9% 13.1% 7.7% 5-Year 1.7% 5.4% 0.3% -3.2% 10-Year 12.3% 11.4% 13.6% 11.0% Source: Morningstar, FTSE,, Prudential Real Estate Investors Research. As of Dec. 31, 2012 Correlation: The performance differences across regions are also seen in the correlation matrix (EXHIBIT 11). The North America region has the highest correlation with overall performance in both indexes (0.962 in and in FTSE). The strongest correlation between regions in both indexes is between North America and Europe (0.923 in and in FTSE). The weakest correlation between regions in both indexes is between Asia- Pacific and North America (0.832 in and in FTSE). 11) 10-YEAR HISTORICAL CORRELATIONS BY REGION World North America Asia-Pacific Europe World 1.00 FTSE N. America EPRA/NAREIT Asia-Pacific Europe World 1.00 N. America Asia-Pacific Europe Source: Morningstar, FTSE,, Prudential Real Estate Investors Research. As of Dec. 31,

11 Size Differential and Performance Although there is a high degree of similarity between the regional and country breakdown of the indexes, there is marked difference in the size composition of the constituent stocks. For our analysis, we will divide the two indexes into four groups based on year-end 2012 market capitalizations: 1) less than $2 billion; 2) between $2 billion and $5 billion; 3) between $5 billion and $10 billion; and 4) greater than $10 billion. The distribution of stocks is very similar by market cap (EXHIBIT 12). Although there are only slight differences in constituency in terms of total market cap in each group (right panel), there is a remarkable difference between the two indices in the number of stocks represented in each group (left panel). 12) BREAKDOWN OF THE MARKET CAP OF CONSTITUENT STOCKS 300 TOTAL NO. OF STOCKS 50% PERCENTAGE OF TOTAL MARKET CAP % % % 50 10% 0 <$2B $2-5B $5-10B >$10B 0% <$2B $2-5B $5-10B >$10B Source: Factset, Prudential Real Estate Investors Research. As of Dec. 31, 2012 tracks a much larger number of smaller stocks than FTSE. About 60% of the 450 stocks in the index universe fall into the smallest size category of less than $2 billion market cap, whereas a little under half of the 303 FTSE stocks are in that group. This means 353 small to mid-cap stocks are in the index compared to only 232 of them in the FTSE index, providing access to a larger number of smaller and potentially faster-growing real estate firms. The difference in the composition of the constituent stocks begs the question of whether there is any difference in the performance of the stocks in different size categories. The answer is yes. As of year-end 2012, the small- and mid-cap stocks in both and FTSE generally outperformed the other two categories of larger stocks during the past 3-year, 5-year and 10-year time periods (EXHIBIT 13). 10

12 13) USD TOTAL RETURNS OVER DIFFERENT TIME HORIZONS 18% 18% DEVELOPED PROPERTY INDEX 15% 15% 12% 12% 9% 9% 6% 6% 3% 3% 0% 0% -3% <$2B $2-5B $5-10B >$10B -3% <$2B $2-5B $5-10B >$10B 3Y 5Y 10Y 3Y 5Y 10Y Source: Factset, FTSE,, Prudential Real Estate Investors Research. As of Dec. 31, 2012 One way to demonstrate the better historical performance of small- and mid-cap REITs is by comparing returns that are weighted by number and volume of stocks. Equal-weighted returns which put a greater emphasis on small- and mid-cap companies than a value-weighted system have produced higher returns in nine of the 11 years since 2002, and especially during the recovery in 2009 (EXHIBIT 14). 14) EQUAL WEIGHTING OF SMALL- AND MID-CAP STOCKS PRODUCES BETTER RETURNS IN MOST YEARS 80% 60% FTSE 80% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% % EQUAL-WEIGHTED VALUE-WEIGHTED EQUAL-WEIGHTED VALUE-WEIGHTED Source: Factset, FTSE,, Prudential Real Estate Investors Research. As of Dec. 31,

13 Using monthly returns between 2008 and 2012, the lowest correlation between the categories in both and FTSE was that between the small- and large-cap stocks (0.92 for the and 0.91 for the FTSE). That was similar to the long-term correlations between US large cap stocks (proxied by 500) and small cap stocks (proxied by Russell 2000). Closing Thoughts Although the overall global commercial real estate universe remains overwhelmingly in private hands, the listed sector has grown significantly over the last decade or more. As the sector gets larger and an increasing number of investors enter the market, there is a growing need to evaluate portfolio investment performance to support decision-making. To make such evaluations, investors need reliable information about metrics such as the size, scope and performance of the asset class. This is not always easy because the structural features of the different listed property companies across the world are as diverse as the markets in which they operate. While there are a host of players that track listed property companies such as UBS, GPR and Dow Jones most market players looking to track the performance of global real estate securities use one of two major indexes: the Developed Property Index and the Developed Real Estate Index. The global results of the two indexes are extremely similar, which is natural because they track many of the same companies in the same industry that with minor exceptions are based in the same countries. However, there are subtle differences between the two indexes that make them distinctive and could impact the performance of investors who only operate within the scope of companies covered by one or the other. One important distinction involves the eligibility criteria. s criteria allows for a broader range of small- and mid-cap companies than the FTSE, whose size requirements are more stringent. The difference is most stark in Asia- Pacific, where covers 158 companies to 75 for FTSE. In the larger developed markets of North America and Europe, the disparity is smaller. covers 21% more companies in North America and 5% more in Europe. Using the index as a benchmark provides more choices to investors who want access to a broader range of smaller and potentially faster-growing real estate firms. That can potentially have an impact on results, since the small- and mid-cap stocks in both indexes have generally outperformed their larger peers over the last 3-year, 5- year and 10-year time horizons. Consequently, it is advisable for investors to understand the differences between the indexes in order to make intelligent choices that could affect performance. 12

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