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More Real Estate Valuation


An Individual investor might purchase a real estate Exchange Traded Fund (ETF) for several reasons.

For Canadian investors there is a choice of … two.

The iShares S&P/TSX Capped REIT index ETF (XRE), price = ~$15, yield = ~5.0% (price/dividend), offers  instant diversification, low MER (0.55% … could be lower), ok volume, a long track record (2002 vintage) and is basically ‘the’ Canadian REIT market … all in one.

Or an investor could look at the new and more diversified but low volume Bank of Montreal, Equal-weight real estate ETF (ZRE) for the same cost (MER = 0.55%). ZRE price is = ~$18.78 and yield is ~5.4%.

To diversify, an investor might look at both.

How might an Individual investor measure value and success?

Institutional investors might use criteria similar to these:

CPI + 4%-5%. The Bank of Canada’s target inflation (CPI) range is from 1%-3%. By this measure an investor would expect to earn 5%-8%.

DEX Universe bond yield + 2%-3%. At April 30/11, the DEX Universe bond yield was 3.2%. By this measure, an investor would expect to earn 5.2%-6.2%.

5-year Government of Canada bond + ~4%. Longer-term, REITs yield ~4% above theCanada5-year bond (which was 2.58% at April 30/11). By this measure, the expectation is that REITs should return ~6.58%.

Is there value at today’s prices?

Current REIT distribution rates alone are not compelling value. Going forward, distributions have to increase or there has to be price appreciation … or both. (i.e. The easy money has already been made). Or REITs are overvalued and prices have to drop. See ‘Stuff looks expensive’.

Unsure? Try dollar-cost-averaging.

Next time?
A bit tipsy.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
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2 Comments Post a comment
  1. Tristram Shandy #

    Sentry Select REIT is paying around 8-9%, depending on your cost. It is a DSC fund with an MER at least 2.5% so if you need to get out it is costly to do so, still at a yield that high,why would you want to?

    Like

    June 3, 2011
    • Risk. You would want to get out of it because you might consider it to be too risky as compared to a collection of REIT holdings in the ETFs XRE or ZRE.

      Like

      June 5, 2011

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