Home Trading ETFs Vanguard Global Ex-U.S. Real Estate ETF: Its Exposure To China And Japan Is Disadvantageous – Vanguard Global ex-U.S. Real Estate ETF (NASDAQ:VNQI)

Vanguard Global Ex-U.S. Real Estate ETF: Its Exposure To China And Japan Is Disadvantageous – Vanguard Global ex-U.S. Real Estate ETF (NASDAQ:VNQI)

by TradingETFs.com
Ploutos Investing


ETF Overview

Vanguard Global ex-U.S. Real Estate ETF (VNQI) has a portfolio of real estate stocks internationally but excludes U.S. stocks. The ETF is a good vehicle for investors seeking exposure in the real estate markets outside of the U.S. However, it has a high exposure to Japan and China where these two countries’ populations will continue to face structural declines in the coming decades. Fortunately, we expect VNQI’s share price to rebound in the near term due to favorable monetary policies by various central banks around the world. Therefore, we think investors should take advantage of the rebound and move money off the table.

Data by YCharts

Fund Analysis

The table below shows the breakdown of VNQI’s portfolio by countries. As can be seen from the table below, the fund has a high exposure to the Asia-Pacific region as stocks from Japan, Hong Kong, China, Australia, and Singapore represent over 60% of VNQI’s portfolio.

Source: Vanguard Website

Here, we will list our reasons why we think this exposure is worrisome.

Japan’s population is ageing and declining and China will soon follow the path

Demand for real estate property is generally driven by population growth and economic growth rates. VNQI’s 23% exposure to Japan is troublesome because Japan’s native population is falling at a record pace since reaching the peak in 2010. In 2019, the country’s population is expected to decline by about 0.27% year over year. If this trend continues, its population may fall below 100 million before 2050. This represents a decline of about 23% from the current level. The declining population is not good news for real estate companies. The direct consequence of this population decline is fewer demand for residential properties. A lower population also means lower consumption. Therefore, the need for retail shops (hence retail properties) will also decline. Fortunately, Japan’s household debt to GDP ratio has gradually declined from the peak of 79.3% in 1999 down to 58.5% in 2018. However, given Japan’s declining population, we think the likelihood of Japanese real estate stocks in VNQI’s portfolio to outperform is low.

Source: Nikkei Asian Review

China’s real estate market is in bubbling territory

VNQI’s 10% exposure to China is worrisome because China’s real estate market is already in a bubbling territory. As can be seen from the chart below, residential real estate prices have increased by 3 folds in Tier 1 cities since 2012. It is becoming challenging for Chinese people to buy homes. As described by a news report, even in “tier-two” cities like Jinan, where a 1000 square feet apartment costs RMB 2 million, a worker may only earn RMB 6,000/month.

Residential real estate prices (Source: KBC Economics)

In the same time, China’s total household debt has more than tripled to US$7.6 trillion in July 2019.

Source: CEIC Data

The already very high household debt coupled with an economic slowdown (not to mention that there are about 65 million vacant residences) will make it very challenging for real estate companies to grow their sales. In fact, in a recent sales data, real estate sales in July by the top 100 Chinese developers declined by 29% from a month ago. Besides near-term challenges, the future is also not on the side of China. In fact, China’s one-child policy has resulted in an ageing population. China will soon follow the path of Japan. According to a report published by the China Academy of Social Sciences, China’s population is expected to peak in 2029. The country’s population could fall to 1.17 billion by 2065 from the peak of 1.44 billion in 2029. Therefore, we do not have a positive view on these Chinese real estate stocks in VNQI’s portfolio.

Prolonged protests in Hong Kong may cause a decline in real estate stocks

VNQI also has higher exposure to Hong Kong (currently about 12% of the portfolio). The key to Hong Kong’s real estate market depends on whether the district will continue to be an important global financial hub or not. If China cannot keep its promise of maintaining its “one country two systems” policy for 50 years, we expect capitals will gradually flow out of Hong Kong. This will impact Hong Kong’s real estate market as well.

A 3.5%-yielding dividend

VNQI pays a 3.5%-yielding dividend. As the chart below shows, its dividend yield is now towards the low end of its 5-year yield range.

ChartData by YCharts

Fortunately, central banks are cutting their interest rates

Real estate stocks in VNQI’s portfolio is sensitive to the change in interest rates. Fortunately, central banks around the world are cutting their key interest rates or expect to introduce more monetary policies to support their economy. This should provide some boost to real estate stocks in VNQI’s portfolio. Although VNQI’s stocks do not include U.S. real estate companies, its performance has a strong correlation to the change of U.S. treasury rates. When the Fed raises the interest rate, it will often result in stronger USD as money flows from other countries to the U.S. to take advantage of higher interest rates. On the other hand, when the Fed lowers the key interest rate, funds will flow out of the U.S. to other countries. The money will often invest in emerging markets and drive the stocks overseas higher. This explains why VNQI’s fund price is inversely correlated to the U.S. treasury rate (see below).

ChartData by YCharts

Investor Takeaway

We think VNQI’s fund price will be supported by a change of monetary policies around the globe as central banks cut their interest rates. However, we do not have a long-term positive view on VNQI due to its high exposure to Japan, and China. Therefore, we recommend investors to take money off the table on any rebounds.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.



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