For investors who seek income and moderate long-term capital growth, Claymore/AlphaShares China Real Estate ETF (TAO) is far more attractive than the US Real Estate ETFs, such as VANGUARD SF REIT ETF (VNQ). Its PE of 18.5 is much more reasonable than VNQ’s 28; Price/Book of 1.3 is also lower than VNQ’s 2. As the US dollar continues to slide along its long-term downward trend, TAO might also give you benefit of Chinese RMB appreciation.

However, both ETFs do not give investors much yield, which is the main reason most REIT investors are attracted to such investments in the first place. Below are the top 3 holdings of each ETF’s yield and payout ratio:

ETF — Stock Yield % — Payout Ratio %

VNQ SPG 3.50% 172%
PLD 3.30% 50%
VNO 3.70% 107%

TAO 0004.HK 1.90% 15%
0012.HK 1.80% 21%
0001.HK 1.80% 19%

Though VNQ has higher yield of 3.5%, which is still lower than 10-year treasure by the way, its payout ratio is over 100%. In other words, it pays out more than it earns. Is it sustainable? I highly doubt it. On contract though, TAO has much lower yield ( 1.85%), given its extremely low payout ratio, there is plenty of room to increate its dividend — if it chooses to do so.

If you think China’s REIT is too risky, or perhaps too good to be true, then you should probably consider Canadian REIT ETFs such as ISHARES CDN S&P/TSX CAPPED REIT (XRE.TO). Its financial metrics (PE, PB, PS and PC) are similar to VNQ’s. However, its yield of 6.25% is much higher, and real estate markets in Canada (both commercial and industrial) are much more stable than in the US.

Note: all data are from Yahoo financial sites as of 5/7/2008.
I have a long position in TAO and XRE.TO.

By Hao Jin, CFA
Guest Contributor