Publicly traded property stocks allow investors to gain exposure to real estate, an illiquid asset class, without sacrificing the liquidity benefits of listed equities. Property stocks also typically offer higher yields than the broad equity market, may serve as an effective inflation hedge, and may help diversify a portfolio due to their generally low correlations to stocks and bonds.
S&P Dow Jones Indices and NZX Limited jointly launched the S&P/NZX Real Estate Select in November 2015 to serve as an investable benchmark for real estate companies listed on the NZX. The index includes the largest, most liquid property companies included in the S&P/NZX All Index. To reduce single stock concentration, the index employs a stock cap of 17.5%, applied semiannually.
Total returns of New Zealand equities, as measured by the S&P/NZX 50 Index, and property stocks, as measured by the S&P/NZX Real Estate Select, were relatively similar over the longer term, while volatility was modestly lower for property stocks (see Exhibit 1). This is somewhat surprising, given that global property stocks have historically had higher volatility than the broader global equity market. As expected, investment-grade bond returns were more modest, but were much less volatile than equities and property stocks.