Real estate investment trusts and related exchange traded funds have become overpriced as investors flocked to yield-generating assets in a low rate environment. However, after the recent selling pressure, the asset class may be more attractively valued.
“Over the course of 2015, Morningstar’s real estate sector coverage has moved from one we viewed as largely overvalued to one that looks more reasonably priced,” writes Todd Lukasik, senior equity analyst for Morningstar. “The sector trades at a 10% or so aggregate discount to our estimates of value, roughly in line with the discount associated with our overall coverage universe.”
Lukasik pointed to health care sector REITs as Morningstar’s favorite area, pointing to companies like HCP (NYSE: HCP), Health Care REIT (NYSE: HCN) and Ventas (NYSE: VTR), which are trading at discounts to estimates of value.
A number of broad REIT ETFs also include these stocks. For instance, the iShares Cohen & Steers Realty Majors (NYSEArca: ICF) holds 4.4% HCP, 4.6% VTR and 6.0% HCN. Health care REITs make up 15.1% of ICF’s sector weights. ICF has a 3.40% 12-month yield.
Additionally, the iShares Residential Real Estate Capped ETF (NYSEArca: REZ) includes a 4.4% HCP position, along with 6.7% VTR and 8.7% HCN. REZ has a 33.3% tilt toward health care REITs and 47.1% in residential REITs. REZ has a 3.39% 12-month yield.