In response to an earlier post on iShares CDN REIT Sector Index Fund (XRE), some readers were interested in the historical risk and return characteristics of REITs. David Swensen writes in Unconventional Success that real estate is riskier and more rewarding than bonds and has less risk and lower returns than equities:
Shorter-term data on market returns confirm the notion that real estate sits between stocks and bonds in risk and return characteristics. Returns covering the quarter century from 1978 to 2003 for an index of marketable real estate securities stand at 12.0 percent per annum, poised between the 13.5 percent per annum return for the S&P 500 and the 8.7 percent per annum return for intermediate-term U.S. Treasury bonds.
Publicly traded REITs have an interesting attribute: they trade at prices that are sometimes significantly different from fair value:
At one point in 1990, by Green Street’s estimate, real estate securities traded at more than a 36 percent discount to fair value. By 1993, the stock market reversed itself, valuing real-estate-related holdings at a 28 percent premium to fair value. The yin and yang continued. In late 1994, the discount reached nine percent, while in 1997, stock market investors paid more than a 33 percent premium to fair value. In the late 1990s, a poor market for real estate securities (that coincided with a wonderful market for most other securities) brought valuations to a deficit of more than 20 percent, a level reached in early 2000. As the non-real estate portion of the market entered bear territory, real estate securities took on bull characteristics, leading to a greater than 22 percent premium to fair value in early 2004.
Though the data used in the book is based on U.S. based REITs, there is no reason to think that the market is very different in Canada. It would be interesting to find out fair value data for Canadian REITs to initiate or add to REIT positions when they are trading at a discount to fair value. Do you know where we can obtain such data?
