Real Estate Investment Trusts (REITs) are investment vehicles that pool investors capital to buy properties and collect rental income.
As such, it would be of interest for investors to study the property portfolios of each REIT to identify the underlying properties the REIT owns. Not all properties are equal, they are in different locations, command different rents, and have different clientele. To normalise the differences, we look at the capitalisation rate of each property, and assess the ‘quality’ of the properties. Also, since REITs have to pay out at least 90 percent of the net income as dividends, the capitalisation rate would offer a good indication of the dividend yield for unit holders.
Most investors may not understand capitalisation rate, but it is equivalent to earnings yield of stocks. If you take the reciprocal of it, it becomes the PE ratio.
For example, if a PE of a stock is …