Additionally, investors may consider the iShares Residential Real Estate Capped ETF (NYSEArca: REZ) as a targeted REITs investment option that focuses on residential REITs, which can capitalize on higher residential rents.
Consider Overall Benefits of REITs
Cedrik Lachance, director of U.S. REIT research at Green Street Advisors, also argued that investors need to consider overall returns on their investments rather than just the current yield. For instance, the unlevered total return expectation of REITs are now trading 30 basis points lower than high-yield bonds versus an historical average of 60 basis points, which suggests REITs are slightly undervalued when compared to speculative-grade debt.
“REITs are not wildly cheap versus corporate bond alternatives, but they are somewhat attractive,” Lachance told CNBC.
Furthermore, REITs may look cheapest relative to the value of their underlying real estate holdings. The REITs segment has historically traded at a 3% to 4% average premium over net asset value of underlying real estate holdings, but they are now trading at an average discount of about 9%.
For more information on real estate investment trusts, visit our REITs category.