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Apr 24, 2025

Insights from ETFs: An Expected Recovery from the Real Estate Market

by Michael Huynh

A Quick Recap Of The Real Estate Market Cycle

In 2023, central banks across the globe instituted a series of interest rate hikes in an effort to curb inflation. Given its susceptibility to high interest rates, these measures had a negative impact on real estate as an asset class. Consequently, real estate investors in both private markets as well as the public markets largely through Real Estate Investment Trusts (REITs) have experienced meaningful drops in the market value of such assets, ranging from a decline of 30% to 50%. Many overleveraged entities turned into financial hardships that led to bankruptcy because of increasing mortgage expenses.

We are currently in an easing cycle where central banks cut rates to stimulate the economy. Economists expect that this would result in a recovery in both consumer spending and asset value, especially in long-duration assets with a highly leveraged capital structure, such as real estate, which would be one of the main beneficiaries of such policies.

While consumer spending has shown improvement from the previous year, the real estate market still has not shown a meaningful recovery yet. Aside from niche real estate assets that benefit from the healthy growth of trends of Artificial Intelligence (AI) investments, such as cloud and data center-related real estate, the majority of the real estate market still has not recovered anywhere close to 2021 levels. As a result, real estate asset valuations in terms of capitalization rates (cap rates) still look quite attractive in terms of risk/reward for investors.

The Long-Term Appeal Of Real Estate As An Investment

Real estate demonstrates some characteristics that most investors are interested in, especially income-seeking investors, including:

  • Predictability: Most real estate assets generate a stable stream of rental income.  The asset itself is for income-seeking investors who prioritize stable distribution over capital appreciation.
  • Inflation-hedge: Real estate owners can transfer the inflationary pressure to tenants through rental increases. For the majority of long-term rental contracts, there is a legal restriction that allows the landlord to raise rents by a certain percentage annually.
  • Scarcity: Limited supply is a key feature for price appreciation over time. This is what makes real estate value appreciate more than population growth and demands over decades.

Public REITs are one of the most popular, low-cost, accessible ways for investors to get exposure to real estate. In addition, REITs provide investors with a decent investing vehicle that combines the features of the liquidity of the public market and secondly, diverse exposure to different real estate niches (data centres, cell towers, residential and commercial properties, etc.).

Investors can invest in, redeem, and take advantage of tax-advantaged accounts, similar to other publicly traded securities like stocks and bonds. Lastly, one of the most important advantages of REITs is that similar to corporations, REITs are managed and leveraged prudently on behalf of investors by real estate professionals and executives.

Here are the three Exchange-Traded Funds (ETFs) that give investors exposure to this investment area:

Vanguard FTSE Canadian Capped REIT Index ETF (VRE)

The Vanguard FTSE Canadian Capped REIT Index ETF (VRE) provide investors with exposure to the broad Canadian real estate equity index. The fund applies a passively managed strategy, targeting companies in the Canadian real estate industry without any restrictions on market capitalization. VRE is a well-established ETF which has $277 million in Assets Under Management (AUM) and a Management Expense Ratio (MER) of 0.39%.

VRE’s portfolio is broadly diversified across real estate niches, including Real Estate Services (30.3%), Retail REITs (20.2%), Residential REITs (15.6%), Industrial REITs (12.3%), etc. The holdings in the ETF provides investors exposure to names across the value chain of the real estate industry rather than just REITs.

The fund currently has 14 names within the portfolio, with some of the fund’s largest positions including FirstService Corp (FSV) at 16.8%, Colliers International Group (CIGI) at 14.2%, Canadian Apartment Properties REIT (CAR.UN) at 10.7%, RioCan Real Estate (REI.UN) at 8.8%, and Granite REIT (GRT.UN) at 7.0%.

The overall portfolio is trading at a very attractive valuation, with the portfolio trading at 22.6 times Price/Earning (P/E) and a Price/Book (P/B) of 1.1x. The ETF also offers a decent twelve-month trailing yield of 2.7% that is paid out monthly.

iShares S&P/TSX Capped REIT Index ETF (XRE)

The iShares S&P/TSX Capped REIT Index ETF (XRE) is a Canadian-focused ETF that seeks to provide investors with long-term capital appreciation by replicating the S&P/TSX Capped REIT Index.

The companies in the portfolio have a decent track record of generating stable and growing cash flow through rental income and are expected to return the majority of the cash flow to shareholders through increasing dividends.

XRE currently has 16 holdings, and the portfolio is diversified across real estate niches of Retail REITs (44.2%), Multi-Family Residential REITs (27.0%), Industrial REITs (15.9%), etc.

Some of its largest positions include Canadian Apartment Properties REIT (CAR.UN) at 10.7%, RioCan Real Estate (REI.UN) at 8.8%, Granite REIT (GRT.UN) at 7.0%, Choice Properties REIT (CHP.UN) at 8.0%, and First Capital REIT (FCR.UN) at 7.6%

XRE currently has around $1.3 billion in AUM, charges an MER of 0.61% and ha a very attractive twelve-month trailing yield of 5.08%.

BMO Equal Weight REITs Index ETF (ZRE)

The BMO Equal Weight REITs Index ETF (ZRE) seeks to replicate the performance of the Solactive Equal Weight Canada REIT Index, designed for investors who are looking for growth in the real estate market. The fund’s holdings include very interesting, under-the-radar small REIT names such as Chartwell Retirement Residences (CSH.UN) at 5.7%, Slate Grocery REIT (SGR.UN) at 5.6%, Artis REIT (AX.UN) at 5.3%, Primaris REIT (PMZ.UN) at 5.2%, and RioCan REIT (REI.UN) at 5.2%.

ZRE manages an AUM of around $554 million, charges an MER of 0.61%, and provides an average dividend yield of 5.2%. The fund has provided investors with an annualized return of around 7.4% (dividends included) since its inception in 2010.