Last October, I wrote an article explaining why I had stopped buying rental properties to buy real estate investment trusts (REITs) instead. I argued that REITs were mispriced, offering an opportunity for investors to buy real estate at a discount to its fair value.
Since then, REITs have risen by 36% on average, even as private real estate has mostly stagnated or even slightly declined in value:
I would also add that this is just the average of the REIT sector, represented by the Vanguard Real Estate ETF (VNQ), which includes the good and bad.
If you were selective and invested in the right REITs, you could have done a lot better. As an example, our largest REIT investment during this time period was Essential Properties Realty Trust (EPRT), and it is up 57% in just 11 months:
But are REITs still a compelling investment opportunity, or has the window for investing in them already closed?
I believe the former is true.
Even after the recent rally, a lot of REITs are still trading at large discounts relative to the fair value of their real estate.
Take the example of BSR REIT (HOM.U:CA), which I discussed in last year’s article. It’s an apartment REIT that specializes in rapidly growing Texan markets. It was priced at a whopping 42% discount back in October 2023 and has recovered somewhat since then, but still trades at a 24% discount today.
In other words, you can still buy an equity interest in the real estate of BSR at 76 cents on the dollar, a better deal than what you would get in the private market. It trades at ~6% implied cap rate, but its properties are worth closer to a ~5% cap rate in the private market.
But I think the days of REITs trading at large discounts are now numbered. The only reason REITs are priced as they are today is because the market overreacted to the surge in interest…