Vanguard Australian Properties ETF (ASX: VAP) is a highly efficient approach to gain access to the domestic listed property sector.

The ETF tracks the S&P/ ASX 300 A-REIT Index. The index covers a wide opportunity set, making this strategy one of our top picks in the Australian real estate category.
VAP is down a little under 4% year to date. A-REITs are operating in a challenging environment with interest rate increases the cost to service debt and bonds now offering a compelling alternative. Morningstar’s Christine St Anne recently covered the outlook for the sector.

The overall weakness of the sector has not impacted the performance of VAP. Goodman Group (ASX: GMG) makes up over 30% of the ETF and is up almost 27% YTD.

Investing in REITs

REITS are companies that own, and in general manage and lease, investment-grade, income-producing real estate.

Unlike in the US, where 150 million, or more than 45% of American households own REITs (according to the National Association of Real Estate Investment Trusts), just 2% of Australian adults, or 490,000 people own this type of investment according to Finder.

Yet REITs can be a good way for investors to get the diversification benefits of real estate without the commitment and responsibilities of directly owning property.

Sarah Dowling covers the differences between investing in direct real estate and REITs in this article. 

The Australian REIT market

The Australian REIT market is narrow, with just 45 listings on the ASX as of September 2023. Given the limited playing field, few active strategies are able to differentiate themselves and outperform the benchmark, thereby making the appeal of passive strategies strong in this market segment.

The Vanguard strategy offers passive exposure to the A-REIT sector by fully replicating the S&P/ASX 300 A-REIT Index. Of the 45 listed A-REITs, the index has 31 constituents with a market cap coverage of over 95%.

The index provides meaningful diversification relative to other sector indexes, but it does carry a fair degree of stock-level concentration.

As of August 2023, the portfolio has 31 constituents, with the top 10 holdings accounting for more than 80% of the portfolio assets.

Top 10 holdings

The portfolio concentration implies that a significant corporate action or a firm exiting the underlying index could cause notable portfolio shifts.

The strategy’s passive nature does not explicitly offer any downside protection in such events. That said, even active strategies do not allay concentration risk meaningfully as they do not stray far from the index, leading to narrow levels of return dispersion within the category. This further boosts the appeal of passive strategies.

The strategy’s low management fee makes the overall holding cost of the strategy very attractive. Its scale is advantageous for trading efficiencies and cash flow management. In totality, the combination of Vanguard’s leadership in index management and the suitability of an index approach for A-REIT exposure makes for an investment case, earning our highest conviction in the strategy.