By Eric Franco

Real estate stocks have now rebounded from the crash during the global financial crisis. But we think valuations are still reasonable, especially as property fundamentals continue to improve in key markets.

Since bottoming in early March 2009, global real estate stocks, as measured by the FTSE EPRA/NAREIT Developed Index, have performed strongly, recovering nearly all the losses suffered during the financial crisis. Now, many investors are asking whether global real estate stocks remain a worthwhile investment. We think the answer is yes.

While global real estate stocks may look pricier than other equities, valuations have only just recovered to levels that are average relative to their own history and they are still attractive when compared with bonds. For example, the cash-flow yield spread to 10-year government bonds remains well above normal.

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The picture is brighter outside the US. Valuations of US real estate stocks

In the current macroeconomic environment characterized by a high degree of uncertainty, modest growth, and low interest rates, investors are finding Real Estate Investment Trusts (REITs) attractive because of the trusts' relatively high dividend yields, relatively stable and predictable lease-based cash flows, and access to capital at favorable terms. As the global economies, especially those in Europe, are severely distressed, investors are seeking investment instruments with relatively low exposures to slowing growth and sovereign debt issues internationally. Thus, given the mostly-domestic profile of their income sources, U.S. REITs are gaining support among investors looking for havens from the international volatility.

In principle, REITs are attractive as they offer consistent current income, paying at least 90% of their taxable income as dividends. Therefore, they usually carry higher dividend yields than many dividend-paying stocks and U.S. government bonds (graph 1 below). As investments, REITs bring diversification to investment portfolios, given

In a low interest rate environment, it was not surprising to see real estate investment trusts (REITs) move up in our ETF rankings over the past few months. Monitoring the health of market leaders is one way to monitor the health of the entire market. When market leaders begin to show cracks, it tends to be negative for the general market. Since our latest ETF rankings saw REITs drop five spots, we decided to take a closer look.

From a fundamental perspective, yield-chasing investors have pushed REIT valuations higher. In a May 15 MarketWatch article, Greg Brewer, executive director of research at Value Line, cautioned REIT investors:

The industry Brewer thinks is a trap for investors now is real estate investment trusts, which have been popular because so many people are seeking yield, but which Brewer said have been bid up way too far, making them a bad proposition