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:
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%.
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