According to the National Association of Real Estate Investment Trusts (REIT), investors in REITs have enjoyed as much as 28 per cent returns in equity each of the last two years, and globally REIT values are up. The question is, can investors expect that same return this year?
A recovering market provides several assets to REIT investors: more dependable tenants, higher occupancy rates, and better resale property values. However, a recovering market also means, in general, higher borrowing rates.
While economists are changing their prediction tune over the Bank of Canada rates announcement to be made July 19 – meaning fewer are thinking the announcement will declare a rate hike – most are still holding onto the opinion that rates will rise by December.
Real estate advisors seem to think that rising rent and property values will offset any rise in borrowing rates.
An alternative, that is significantly less costly than purchasing into a REIT, that the beginner may want to consider is a mutual fund that invests in a pool of publically traded REITs.
“In the REIT sectors, actively-managed funds have tended to outperform the indices over extended period of times,” Craig Leupold, president of an investment research firm specializing in REITs in the U.S., told CNBC. “There are inefficiencies in the market that allow active managers to outperform. ”
The CNBC article noted that investor interest and cash flow into REITs or REIT-based mutual funds will also have a large influence on their returns this year.
REITs were created in the U.S. 50 years ago as a security that allows for a group investment in real estate, by investing in mortgages or by directly owning the properties. In Canada the term has come to be used to describe a trust in which investors purchase units, much like they would purchase shares in a corporation, which are traded on a public stock exchange such as the TSX.
Charles Dillingham, of Toronto’s Morguard Financial Corp, oversees roughly $225-million in retail and institutional portfolios. In his conversation with the Globe and Mail, he stated the opinion that while REITs are no longer a “bargain” in Canada, those based in Alberta have a greater chance of gain.
“The office market, particularly, is rebounding in a fashion that was not expected,” he said. Dillingham runs both the CIBC Canadian Real Estate fund and the Morguard Sunstone Real Estate Income Fund, listed on the TSX. “Without a lot of growth in the economy to help increase corporate profits, it is very hard for the stock market prices to move up much more.”
In Alberta, increased drilling and crude prices could prove to do just that – improve the market. Dillingham added he has taken guard against potential volatility by upping U.S. holdings to account for 20 per cent of his CIBC portfolio and putting funds into a Canadian nursing home provider.
Though he said he stays leery of malls, his picks included First Capital Realty Inc., Leisureworld Senior Care Corp. and the Canadian Real Estate Investment.
