An inspection of two Property ETFs

Australians have had a love affair with property. So much so, that according to the Australian Bureau of Statistics, the value of residential property in Australia was $9.6 trillion at the end of the Dec 2022 quarter. 

However, while the focus is often on residential property, over the last decade or so, it has become a lot easier for investors to buy into commercial property via ETFs.  

Commercial property includes office, retail, industrial, self-storage, hotels, resorts and healthcare facilities. 

In this review, we’ll look at two property ETFs, VAP, Vanguard Australian Property Securities Index ETF, and DJRE, which is State Street’s SPDR Dow Jones Global Real Estate ESG Fund. 

VAP holds a portfolio of 30 Australian REITS (Real Estate Investment Trusts), and DJRE holds a portfolio of 245 global property companies. 

Both VAP and DJRE can be found in InvestSMART’s Property and Infrastructure Portfolio, with each making up 24.75% of the portfolio as of 31 March 2023. There is also a 2% - 3% holding of VAP in each of InvestSMART’s Conservative, Balanced, Growth and High Growth investment portfolios. 

Performance 

The following table shows the total returns (including distributions) of VAP and DJRE for the period ending 31 March 2023.  

In this table, please note that when comparing the two, the inception date for VAP is Oct 2010, whereas DJRE’s inception date is Nov 2013 (just less than 10 years ago). 

As can be seen from the table, both of these property ETFs have struggled over the past 12 months, but have provided good returns over the long-term. 

The current market 

There are a couple of reasons for the declines in commercial property over the last 12 months, and these reasons will likely keep pressure on the sector for a while yet. 

The first reason is the structural change that has occurred in the workforce post covid. It appears that the hybrid working model for office workers is here to stay. Workers like the new arrangements, as it cuts out travel time (and costs) for a couple of days a week, and some companies like it too, as it helps to lower office costs.  

The second reason is that rising interest rates have caused the cost of debt to rise. This can make a project unviable, but can also lower the value of the building. This becomes a major problem when the debt needs to be refinanced, and not only for the property owner, but also for the bank that holds the debt. 

In a recent example, a 22-story office tower in San Francisco, which was valued at $300m in 2019, is now expected to sell for just $60m, which is an 80% drop in value. 

At the recent Berkshire Hathaway AGM, Charlie Munger said, “I do think that the hollowing out of the downtowns in the United States and elsewhere in the world is going to be quite significant and quite unpleasant. I think the country will get through it all right, but as they say, it will often involve a different set of owners”. 

Though the stress in the office sector could remain for a while yet, some sectors such as Industrial and Self-Storage are doing okay, and that’s why a diversified portfolio is always good. 

At some stage down the track, a new normal will be reached and growth can begin again. Even today some office buildings in cities like New York are being converted into residential apartments, where there is demand. 

So, let’s take a closer look at VAP and DJRE. 

VAP 

The Vanguard Australian Property Securities Index ETF (VAP) is the largest Australian Property ETF in Australia with $2.24bn AUM (Assets Under Management) as of 31 March 2023. 

The objective of the ETF is to track the return of the S&P/ASX 300 A-REIT index, before taking into account fees, expenses and tax. The ETF’s management fee is very reasonable at 0.23% p.a. and the fund invests in a total of 30 REITs. 

Here is a list of VAP’s Top 10 holdings as of 31 March 2023. 

The largest sector weightings in the ETF are Diversified REITs with 30.1%, Industrial REITs with 28.1%, Retail REITs with 27.1%, Office REITs with 8.1% and Self-Storage REITs with 2.5%. 

DJRE 

The SPDR Dow Jones Global Real Estate ESG Fund (DJRE) has $414m of AUM (Assets Under Management) as of 31 March 2023. 

The objective of the ETF is to closely track the return of the Dow Jones Global Select ESG Real Estate Securities Index (RESI)(AUD), before taking into account fees and expenses. The ETF’s management fee is 0.5% p.a. and the fund has 245 holdings. 

Here is a list of the ETF’s Top 10 holdings as of 31 March 2023. 

The fund invests in property companies from all around the world, including the US with 70.1%, Japan with 9.8%, the UK with 3.8%, Singapore with 3.2%, and Australia with 2.8%. 

The largest sector weightings in the ETF are Industrial/Office with 31.6%, Retail with 17.6%, Residential with 15.0%, Diversified with 9.0% and Self-Storage with 8.1%. 

So where to from here? 

There still may be quite a lot to play out, especially in the office space in the US. Though some of this is already priced into the market, there still could be challenges ahead. It’s also difficult to predict the direction of interest rates into the future, which may increase or decrease pressure on commercial real estate. 

Property ETFs do though provide plenty of diversification across companies, sectors, and countries (as is the case with DJRE).  

However, given the challenges, property ETFs are best placed to be just a small part of a well-diversified investment portfolio.  

Want to know how these ETFs fit into the InvestSMART portfolios? Start a chat with the team in the bottom-right corner. Our chat is manned by the team Monday to Friday. If you've got questions outside of office hours ask them anyway and we'll get straight back to you!