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JUL 11, 2016

S3 BLACKLIGHT: Brexit Real Estate Pairs Trade – U.S. vs U.K. REIT ETF’s

The Brexit vote has created trading opportunities in equities, fixed income, currencies, interest rates and real estate. A simpler way to trade interest rates and real estate is through REIT ETF’s. The Vanguard REIT ETF (VNQ US) and the IShares U.K. Property UCITS ETF (IUKP LN) short sides have been trading as mirror images since the Brexit vote.

VNQ is up 15% year to date and is the bigger and more liquid of the two REITS with a market cap of $35 billion. IUKP is down 14% year to date with a market cap of $880 million.

Brexit short interest in VNQ, as of June 23rd, was almost $950 million and quickly dropped 15% by July 1st to $790 million. IUKP short interest on June 23rd, when it hit its year to date high price of $9.56, was $78 million and rose 110% to $164 million by July 1st.

Short interest in both ETF’s reversed course in July. Short interest in VNQ rose 44%, to $1.14 billion as the stock hit its year to date stock price high of $90.09 today. While IUKP short interest fell 55%, down to $73 million, as its stock price fell 27% to $6.99, $2.57 off its recent high.

With interest rates and the real estate markets reacting differently to the Brexit vote in the U.S. and the U.K., these two real estate REITS have shown to be, at least recently, a pairs trade to produce Alpha from both sides of the pond.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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