Published:
June 9, 2008
iShares S&P World ex-U.S. Property (NYSE: WPS, $43.62) tracks firms that own,
manage, lease, or invest in properties located outside the U.S.
This list includes real estate investment trusts (REITs), as
well as land investors and real estate leasing firms.
Catalysts: The decline in the U.S. residential property
market has been well-publicized in recent months. And while the
market for office buildings and shopping malls remains solid,
growth in rents has clearly slowed. But that's not the case in
many parts of the world.
In Hong Kong and China, for example, the property market for
residential and commercial real estate alike continues to boom.
China's economy continues to grow at around +10% annualized; as
the economy continues to develop, individuals' disposable income
is rising. And as consumers gain more disposable income, they're
increasingly able to take on credit in the form of mortgage
loans. While Hong Kong is a developed economy, it too has
benefited from mainland China's rapid growth.
In addition, the value of the Hong Kong dollar is pegged to that
of the U.S. dollar. China also controls the value of its
currency relative to the dollar. As a result, these countries
essentially import U.S. monetary policy -- when U.S. interest
rates fall, rates in Hong Kong must also decline to maintain the
currency peg. Therefore, the Fed's recent cuts have actually
made mortgage loans and commercial property loans cheaper in
these countries, fueling yet more demand. Roughly 21% of WPS is
invested in Hong Kong-listed property firms owning or managing
properties mainly in Hong Kong and China.
Meanwhile, Japan -- where the fund has significant holdings --
is a developed market and throughout the 1990s, commercial and
residential property values suffered a prolonged hangover from a
bubble in the late 1980s. But Japan's real estate market appears
to have found a low in recent years, and Japanese banks'
financial situation has improved remarkably as they have shed
non-performing loans. Lending activity has picked up and real
estate prices are finally starting to recover.
This has powered a major run-up in Japanese real estate firms
over the past five years. For example, the second-largest
holding of WPS is Mitsubishi Estate, a firm that leases and
develops commercial properties in central Tokyo -- the stock is
up nearly +350% over the past five years alone. With roughly a
fifth of its assets in Japanese firms, WPS is a major
beneficiary of a continued recovery in Japanese real estate.
The outperformance of many foreign stock markets in comparison
to the S&P 500 has been a major investing theme over the past
few years. The same trend is clear in foreign real estate
markets, and WPS offers an outstanding way to play that trend.
Competitive Advantages: By definition, all of the fund's
holdings are listed outside the U.S. Roughly three-quarters of
these stocks do not trade liquidly as ADRs in the States.
Therefore, WPS offers investors easy access to securities that
would otherwise be tough to buy.
WPS also offers broad diversification by country. Real
estate markets globally are less correlated than stock markets.
That means it's likely real estate in Tokyo, London and Hong
Kong are not moving in the same direction at any given point in
time. By diversifying its holdings widely, WPS drastically
lowers market risk.
Valuation and Outlook: My staff and I expect continued
strength in global property markets, even as the U.S. market
cools. And despite strong performance in global property shares,
most of the fund's holdings don't look overvalued. In addition, the ETF may
well emerge as a solid high-yield play as well.
Paul Tracy
Editor
StreetAuthority
Market Advisor
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Virginia, has appeared as a guest expert on several prominent financial radio
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Paul graduated with a B.S. in Finance and Management from the McIntire School
of Commerce at the University of Virginia.
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