Yield-seekers embrace emerging market real estate  

Maxine Elliott    Catherine Yoshimoto, director, product management, FTSE Russell
22 May 2019
Categories: Investor Education, Equity Investments

Country or region: Asia Pacific (Overall)


Investors seeking yield turn to the real estate equities around the globe for their income-generating potential. Initially focused on developed countries, they have recently been showing interest in emerging markets.

Reference URL: https://www.ftserussell.com/blog/yield-seekers-embrace-emerging-market-real-estate


As we enter the second decade of a low interest rate environment, there’s no question we can count the real estate equity sector among the beneficiaries of this era of yield scarcity. This has been true for real estate equities around the globe, as investors have continued to seek them for their income-generating potential. However, while investors’ search for yield initially led them to real estate equities from developed countries, more recently we’ve seen a stronger rally in emerging markets.
If we look back 10 years, global real estate equities began their upward trajectory shortly after the financial crisis set the low interest rate environment in motion. As shown below, both the FTSE EPRA Nareit Developed Index and the FTSE EPRA Nareit Global Index have outperformed the FTSE Global All Cap Index for the 10 years ending March 2019.

While this graph demonstrates that global real estate equities outperformed the broader equity market over the past decade, it also shows that emerging markets real estate fell short. However, if we look only at the past five years we can observe that emerging markets real estate equities have been a stronger relative performer over more recent time periods. As shown below, the FTSE EPRA Nareit Emerging Index outpaced both developed real estate equities and the broader global equity market for the year-to-date, 3-year and 5-year annualized periods.

The above graph is also telling with respect to what has been driving this recent outperformance. China real estate equities represent over half of the FTSE EPRA Nareit Emerging Index, and this country has delivered particularly strong relative returns recently, fueled by surging sales for China’s property developers.
Given China is such a large portion of the index, it’s important to note that the FTSE EPRA Nareit indexes will be impacted by our upcoming inclusion of China A-Shares in all indexes derived from our FTSE Global Equity Index Series. As shown below, our FTSE EPRA Nareit Global Index is constructed as a subset of the FTSE Global Equity indexes, so changes from the broader index family trickle down to FTSE EPRA Nareit Emerging Index.

This index is also affected by our March 2018 decision to upgrade Saudi Arabia to Secondary Emerging market status. The process of inclusion for these securities in our EPRA indexes began in March of this year, while China A shares inclusion is expected to commence this June.  
As part of FTSE Russell’s ongoing commitment to keeping investors informed on index changes, we’ve put together an FAQ for Saudi Arabia inclusion and an FAQ and implementation plan for China A shares inclusion.
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