Index Education

Indexing Listed
Property Stocks in
New ZealandContributor
Michael Orzano, CFA
Senior Director
Global Equity Indicesmichael.orzano@spglobal.com

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 theirgenerally 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 aninvestable 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 and volatility 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 (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 much less volatile than equities and property
stocks.

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Indexing Listed Property Stocks in New Zealand

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Exhibit 1: Comparative Asset Class Performance Characteristics
S&P/NZX 50 Index

S&P/NZX Composite
Investment Grade Bond Index

S&P/NZX Real
Estate SelectS&P Global 1200

1-Year

4.9

-2.3

-2.0

14.0

3-Year

0.9

-4.1

0.4

12.1

5-Year

6.2

0.2

5.5

9.5

10-Year

10.3

2.5

8.2

9.8

15-Year

8.9

4.0

8.3

8.1

Since July 2006

7.4

4.2

7.1

7.7

3-Year

11.4

4.7

11.6

17.5

5-Year

12.9

4.4

14.6

17.9

10-Year

10.9

3.5

11.6

14.4

15-Year

11.2

3.6

11.3

16.7

Since July 2006

11.6

3.4

11.6

16.2

3-Year

0.08

-0.88

0.03

0.69

5-Year

0.48

0.04

0.38

0.53

10-Year

0.94

0.70

0.71

0.68

15-Year

0.80

1.12

0.74

0.49

Since July 2006

0.64

1.23

0.61

0.47

PeriodAnnualized Return (%)

Risk (Standard Deviation, %)Risk-Adjusted ReturnSource: S&P Dow Jones Indices LLC. Data as of July 31, 2023. Risk is defined as the standard deviation of monthly total returns. The
S&P/NZX Real Estate Select was launched Oct. 12, 2015. All data prior to index launch date is back-tested hypothetical data. Past
performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance.
Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated withback-tested performance.

As shown in Exhibit 2, the S&P/NZX Real Estate Select historically had relatively low
correlations to both the S&P/NZX 50 Index and the S&P/NZX Composite Investment Grade
Bond Index.
Exhibit 2: Historical Asset Class Correlations
Correlation
S&P/NZX 50 Index

S&P/NZX 50
Index

S&P/NZX Composite
Investment Grade Bond Index

S&P/NZX Real
Estate SelectS&P Global
1200

1

-

-

-

S&P/NZX Composite
Investment Grade Bond Index

0.09

1

-

-

S&P/NZX Real Estate Select

0.62

0.18

1

-

S&P Global 1200

0.66

-0.09

0.43

1

Source: S&P Dow Jones Indices LLC. Data from July 31, 2006, to July 31, 2023. Correlations based on 204 monthly total returns. The
S&P/NZX Real Estate Select was launched Oct. 12, 2015. All data prior to index launch date is back-tested hypothetical data. Past
performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance.
Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated withback-tested performance.
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Indexing Listed Property Stocks in New Zealand

September 2023

Exhibits 3 and 4 illustrate the potential diversification benefits of adding a listed property
allocation to a stylized equity or equity/bond portfolio. For example, a hypothetical 80%/20%
combination of the S&P/NZX 50 Index and S&P/NZX Real Estate Select resulted in a reduction
in volatility of over 70 bps compared with a 100% position in the S&P/NZX 50 Index. This
reduction was driven by the relatively low correlation between the indices.
Exhibit 3: Combining New Zealand Stocks and Listed Property
Index

Total Return (%)

Risk (%)

Return/Risk

S&P/NZX 50 Index

7.40

11.64

0.64

S&P/NZX Real Estate Select

7.09

11.59

0.61

80% Stocks/20% Property

7.43

10.91

0.68

The 80% Stocks/20% Property portfolio is a hypothetical portfolio.
Source: S&P Dow Jones Indices LLC. Data from July 31, 2006, to July 31, 2023. All figures are annualized. Risk is defined as theannualized standard deviation of monthly total returns. The S&P/NZX Real Estate Select was launched Oct. 12, 2015. All data prior to index
launch date is back-tested hypothetical data. Past performance is no guarantee of future results. Table is provided for illustrative purposes
and reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information
regarding the inherent limitations associated with back-tested performance.

Similarly, adding a 10% listed property allocation to the equity portion of a 60% S&P/NZX 50
Index and 40% S&P/NZX Composite Investment Grade Bond Index portfolio resulted in afurther reduction in volatility and higher risk-adjusted return over this period.
Exhibit 4: Combining New Zealand Stocks, Bonds and Listed Property
Index

Total Return (%)

Risk (%)

Return/Risk

S&P/NZX 50 Index

7.40

11.64

0.64

S&P/NZX Real Estate Select

7.09

11.59

0.61

S&P/NZX Composite Investment
Grade Bond Index

4.22

3.44

1.23

60% Stocks/40% Bonds

6.30

7.24

0.87

50% Stocks/40% Bonds/10% Property

6.30

6.90

0.91

The 60% Stocks/40% Bonds and 50% Stocks/40% Bonds/10% Property portfolios are hypothetical portfolios.
Source: S&P Dow Jones Indices LLC. Data from July 31, 2006, to July 31, 2023. All figures are annualized. Risk is defined as theannualized standard deviation of monthly total returns. The S&P/NZX Real Estate Select was launched Oct. 12, 2015. All data prior to index
launch date is back-tested hypothetical data. Past performance is no guarantee of future results. Table is provided for illustrative purposes
and reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information
regarding the inherent limitations associated with back-tested performance.

Furthermore, New Zealand property stocks had attractive yields relative to both equities andbonds in recent years, even as bond yields have increased sharply of late (see Exhibits 5 and
6). Although bond yields have recently become competitive with REITs, the average yield of
the S&P/NZX Real Estate Select over the past five years exceeded the S&P/NZX 50 Index and
S&P/NZX Composite Investment Grade Bond Index by about 140 bps and 200 bps,
respectively. It is also important to remember that bonds, unlike REITs, do not offer
opportunities for capital appreciation.

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Indexing Listed Property Stocks in New Zealand

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Exhibit 5: Historical Yield
7.0
6.0

Yield (%)

5.0
4.0
3.0
2.0
1.0
0.0
July 2018

July 2019

S&P/NZX 50

July 2020

July 2021

S&P/NZX Real Estate SelectJuly 2022

July 2023

S&P/NZX Composite Investment Grade Bond

Source: S&P Dow Jones Indices LLC. Data from July 31, 2018, to July 31, 2023. Past performance is no guarantee of future results. Chart isprovided for illustrative purposes.

Exhibit 6: Average Yield
5.0
4.35

4.5
4.0

Yield (%)

3.5
2.96

3.0

2.32

2.5
2.0
1.5
1.0
0.5
0.0
S&P/NZX Real Estate Select

S&P/NZX 50

S&P/NZX Composite Investment Grade Bond

Source: S&P Dow Jones Indices LLC. Data from July 31, 2018, to July 31, 2023. Past performance is no guarantee of future results. Chart isprovided for illustrative purposes.

Conclusion
In summary, in comparison with New Zealand equities, New Zealand property stocks havehistorically had similar total returns and relatively high yields, while maintaining comparable
levels of volatility. Moreover, their relatively low correlation to both equities and bonds serves
to reinforce the potential benefits of including property stocks in a broader portfolio context.

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Performance Disclosure/Back-Tested Data
The S&P/NZX Real Estate Select was launched Oct. 12, 2015. All information presented prior to an index’s Launch Date is hypothetical (backtested), not actual performance. The back-test calculations are based on the same methodology that was in effect on the index Launch Date.
However, when creating back-tested history for periods of market anomalies or other periods that do not reflect the general current market
environment, index methodology rules may be relaxed to capture a large enough universe of securities to simulate the target market the index
is designed to measure or strategy the index is designed to capture. For example, market capitalization and liquidity thresholds may be
reduced. Complete index methodology details are available at www.spglobal.com/spdji. Past performance of the Index is not an indication of
future results. Back-tested performance reflects application of an index methodology and selection of index constituents with the benefit ofhindsight and knowledge of factors that may have positively affected its performance, cannot account for all financial risk that may affectresults and may be considered to reflect survivor/look ahead bias. Actual returns may differ significantly from, and be lower than, back-tested
returns. Past performance is not an indication or guarantee of future results. Please refer to the methodology for the Index for more details
about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as
all index calculations. Back-tested performance is for use with institutions only; not for use with retail investors.
S&P Dow Jones Indices defines various dates to assist our clients in providing transparency. The First Value Date is the first day for which
there is a calculated value (either live or back-tested) for a given index. The Base Date is the date at which the index is set to a fixed value forcalculation purposes. The Launch Date designates the date when the values of an index are first considered live: index values provided forany date or time period prior to the index’s Launch Date are considered back-tested. S&P Dow Jones Indices defines the Launch Date as thedate by which the values of an index are known to have been released to the public, for example via the company’s public website or its data
feed to external parties. For Dow Jones-branded indices introduced prior to May 31, 2013, the Launch Date (which prior to May 31, 2013, wastermed “Date of introduction”) is set at a date upon which no further changes were permitted to be made to the index methodology, but that
may have been prior to the Index’s public release date.
Typically, when S&P DJI creates back-tested index data, S&P DJI uses actual historical constituent-level data (e.g., historical price, market
capitalization, and corporate action data) in its calculations. As ESG investing is still in early stages of development, certain datapoints used to
calculate S&P DJI’s ESG indices may not be available for the entire desired period of back-tested history. The same data availability issue
could be true for other indices as well. In cases when actual data is not available for all relevant historical periods, S&P DJI may employ aprocess of using “Backward Data Assumption” (or pulling back) of ESG data for the calculation of back-tested historical performance.
“Backward Data Assumption” is a process that applies the earliest actual live data point available for an index constituent company to all priorhistorical instances in the index performance. For example, Backward Data Assumption inherently assumes that companies currently not
involved in a specific business activity (also known as “product involvement”) were never involved historically and similarly also assumes thatcompanies currently involved in a specific business activity were involved historically too. The Backward Data Assumption allows the
hypothetical back-test to be extended over more historical years than would be feasible using only actual data. For more information on“Backward Data Assumption” please refer to the FAQ. The methodology and factsheets of any index that employs backward assumption in the
back-tested history will explicitly state so. The methodology will include an Appendix with a table setting forth the specific data points andrelevant time period for which backward projected data was used.
Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices maintains the index
and calculates the index levels and performance shown or discussed but does not manage actual assets. Index returns do not reflect paymentof any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are intended to track
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securities/fund to be lower than the Index performance shown. As a simple example, if an index returned 10% on a US $100,000 investment
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accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three-year period, an annual 1.5% fee
taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US $5,375, and acumulative net return of 27.2% (or US $27,200).

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