“Investors strive more and more to ethical allocations that take into account well-defined ESG criteria.” - Tim Vanvaerenbergh
The strong growth in REIT investing was enabled by several attractive investment characteristics offered by listed real estate companies. They ensure a regular and predictable income stream through the distribution of above average dividends. Also the effect of annual capital gains through higher share prices should not be underestimated. Second, a portfolio of REITS has exposure globally to different segments within real estate – offices, logistics, retail, retirement homes and residential – and also benefits from the specialized management teams in charge of the companies. Lastly, as an alternative asset class, real estate has a reduced correlation with more traditional investments in equities and bonds. The global real estate market does not follow variations in stock or bond valuations slavishly and is therefore seen as an excellent diversification for an investment portfolio.
It is indispensable for a well-diversified portfolio to have an allocation to listed real estate. From an implementation point of view, this is not a straightforward task given there are more than 2500 real estate companies listed worldwide. In their new index, Reitsmarket selects REIT companies based on a low-risk profile and high earnings forecasts, which translates into a diversified and performing portfolio.
But for an increasingly large group of private and institutional investors, achieving only good risk-returns is no longer sufficient. They are looking for investments in companies that are also aware of their environmental and social responsibilities. Investors strive more and more to ethical allocations that take into account well-defined ESG criteria. Real estate groups that meet these criteria can certainly be found because companies in this space are increasingly putting focus on elements such as energy efficiency, environmental awareness, waste policies and renewable energy.
Until now, the investment world lacked initiatives that connected real estate and sustainable investing. The Euronext Reitsmarket Gresb Global Sustainable index is an exception to this.
How is this new index composed? In a first step, the global REIT universe is passed through a screening that verifies whether companies communicate and report in a sufficiently transparent manner around sustainability. To perform this screening, Reitsmarket is partnering up with GRESB. The sustainability screening focuses on the ESG awareness and transparency of REITS and examines each company on the availability of public reports and certificates regarding energy and water consumption, waste policy, renewable energy, stakeholder engagements and many other aspects. In other words: who communicates what and who is active in creating transparency around ESG factors. After the GRESB screening, a globally diversified sub-universe of more than 200 sustainable REITS remains as eligible index constituents. This exercise is repeated annually. Given that real estate companies are increasingly becoming aware of their environmental and social responsibilities, the list is growing each year.
After screening, Reitsmarket selects 30 real estate companies for the Euronext Reitsmarket GRESB Global Sustainable index through quantitative and algorithmic methodologies. On the one hand, Reitsmarket examines quarterly figures of REITS to identify companies that are undervalued and link financial health to above-average earnings growth. On the other hand, more market technical factors such as return expectations and various risk factors are also taken into the equation. REITS with a low risk profile are clearly preferred in the selection. This procedure is repeated quarterly in order to respond dynamically to changing market conditions.
The whole methodology is completely systematic, which allows the construction of specialized indexes that aim to outperform the general real estate market. The end result is an investment in globally diversified real estate that offers good portfolio diversification within a sustainable framework.