Real estate investment trusts and related exchange traded funds have experienced another strong year as investors sought out high-yield-generating options. However, space may starting to look pricey.
“U.S. REITs appear somewhat overvalued as a group,” writes Todd Lukasik, senior analyst covering real estate, for Morningstar.
For instance, the Vanguard REIT ETF (NYSEArca: VNQ) shows a 36.1 price-to-earnings ratio and a 2.28 price-to-book and iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) has a 33.9 P/E ratio and a 2.3 P/B ratio. In comparison, the S&P 500 index has a 17.5 P/E and a 2.4 P/B.
So far this year, REITs have been outperforming, with VNQ up 14.1% and IYR 12.9% higher, whereas the S&P 500 has gained 8.3%.
Investors have turned to REITs for their favorable yields as an attractive alternative to falling yields in the fixed-income market. Specifically, VNQ shows a trailing 12-month yield of 2.97% and IYR comes with a 2.46% 12-month yield.
Lukasik is particularly wary about office and residential sectors, which he argues appear the most overpriced.
For example, the iShares Residential Real Estate Capped ETF (NYSEArca: REZ) shows P/E ratio of 36.9 and iShares Industrial/Office Real Estate Capped ETF (NYSEArca: FNIO) has a P/E of 42.6. [Residential REITs: Renters Aren’t Buying]