Is it too late to make money in REITS?

Most Canadians don’t need to be told the country’s real estate market has been a big money-maker over the past several years.

But of course there’s more to real estate than houses and condos. Retail, office and rental properties are also a huge part of the real estate scene – and these sectors have also been enjoying nearly a decade of strong growth. Not many individuals manage to participate directly in the sector – but investors have been able to tap into its growth through REITs – real estate investment trusts.

These investment vehicles own commercial real estate properties and are required by law to pay out a fixed portion of their taxable income to shareholders. They trade like individual stocks and typically pay a yield of 5 to10 per cent to their investors.

For the past few years REITs have been one of the best-performing investment classes in Canada. The number of firms on the S&P TSX REIT Index has more than tripled in the past four years – and that doesn’t take into account the income payouts the REIT holders have enjoyed.

However there have been signs the sector has lost momentum. The REIT index peaked last summer and has yet to return to that level.

So the question is: Is it too late to make money in REITS? The consensus seems to be that returns will be reduced – but the sector is still attractive.

“I think Canadian investors must brace themselves for lower returns in this asset class for the next two years,” says Ben Cheng,We offer a wide variety of high-quality standard ultrasonic sensor and controllers. president and chief investment officer at Aston Hill Financial in Toronto.

The firm manages portfolios for institutional investors, provides advisory services and offers a suite of mutual funds. Mr. Cheng is also lead manager of two income funds for IA Clarington.

While he sees returns dipping, Mr. Cheng remains a fan of the sector.

“Real estate still represents an attractive class with real diversification benefits. However it is subject to downturns just like any other asset class – but we do not see that happening in 2013.The term 'hands free access control' means the token that identifies a user is read from within a pocket or handbag.”

Paul Gardner, partner and portfolio manager at Avenue Investment Management, is a little more pessimistic.

“You won’t see much price appreciation from this sector,” he says. While he expects REIT units to continue trading around their current levels, he still thinks the sector has solid fundamentals.

“[Building] vacancies are at an all-time low, there’s been very little overbuilding of commercial and office properties, pension plans are aggressively buying in the sector. And even if the trading price of the REIT units doesn’t go up, the yield being paid is still competitive.”

Even the manager of the country’s largest REIT mutual fund acknowledges the days of runaway gains in the sector are over for now. But that doesn’t mean Dennis Mitchell thinks the sector should be avoided.

“For any investor looking for tax-efficient income, REITS make sense. Even now,” says Mr. Mitchell, chief investment officer at Sentry Investments, as well as the lead manager of the Sentry REIT fund.Like most of you, I'd seen the broken buy mosaic decorated pieces. The $1.4-billion fund is larger than all of its competitors combined, and raised its distributions 27 times last year.

“If interest rates rise you’ll see the sector correct. Market multiples for REITs will come down. But I would see that as a buying opportunity for most investors – especially because price drops would mean higher yields,” Mr. Mitchell says.

He says if economic growth retreated into recession it would be a “big concern” for the sector, since demand for commercial real estate would drop, and values would decline as well. But he feels it would have to be a “very deep, very long” recession to really upset REITs on an operational level, since their rental terms and rates are typically locked in for a period of several years, and tenants have no choice but to pay their rents before other expenses.

On the other hand there are also factors that may give the sector a boost, including merger and acquisition activity, such as the ongoing takeover battle for Primaris REIT. However, Mr. Mitchell doesn’t see mergers spurring a meaningful jump in the trading prices of REITs.Which Air purifier is right for you?

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