The development of property index funds provides a simple and easy way for real estate investors to take advantage of the varying cycles in European residential markets. This can provide some surprising diversification benefits, new research from Alpha Beta Fund Management (ABFM) shows.
"Investors in European residential markets can now take advantage of the negative correlation between UK and Continental housing investment
markets. Our funds exhibit a greater than 50% negative correlation with the ROZ/IPD Dutch residential index, for example," ABFM founding partner Robert Page said.
ABFM is launching the first UK Residential Index fund (UKRIF), based on the Halifax House Price Index that gives pension funds, funds of funds managers and other investors access to Europe's single largest investment asset class. The British housing market is valued at nearly £4 trillion (5.7 trillion) twice the size of the UK's equities market.
"The different residential property cycles in the UK and Continental European markets, combined with the varying central bank policies in the eurozone and Britain, as well as macroeconomic factors, together create a strong case for the cross-border diversification of residential property," Page added. The correlation between ABFM's Core UK Residential Index Fund and fund benchmarker IPD's Dutch residential index is a negative -0.51, and -0.54 and -0.21 respectively for residential indices in Sweden and Germany.
A structural imbalance between supply and demand, fuelled by strong immigration into the UK and tight planning restrictions, have made residential property both the best performing asset class and the most defensive one. Institutional investors have had little opportunity to access the UK market up until now, as it is largely owner occupied.
Independent forecasters expect this demand and supply imbalance to continue to drive capital growth. Their forecasts would translate into 14% a year returns for the UKRIF Core Fund and 20% a year for the UKRIF Value Added Fund over the next 5 years.
Residential index funds diversify investment risks across the market. With house prices much more closely correlated to trends in wage growth than other assets, such as equities, bonds and commercial property, they can also provide a closer match to pension fund liabilities.