Tuesday, January 10, 2012

Do not rush into REITs

There are numerous REITs (Real Estate Investment Trusts) listed on the TSX and knowing all their in and outs is too much unless you're specialized in it. To choose which one is better is even more difficult and these days I prefer investing into ETFs comprising REITs, in particular 'iShares S&P/TSX Capped REIT' symbol XRE. In general the largest REITs are usually of the best quality and many have their own area of specialty such as RioCan for shopping malls, BoardWalk for Western Canadian apartments, Canadian Real Estate Investment Trust (symbol REF.UN) for high quality retail, office, and commercial real estate, Calloway for senior housing, Brookfield Office Properties (well this is a corp not a REIT), etc. If you want to learn more about specific REITs check the internet or watch BNN Market Call that features sometimes money managers specializing in REITs and Real Estate investments. They discuss many of those REITs including the latest gossip about them. That is a great starting point for research.

The point I am trying to make though is that REITs are dependant on a healthy real estate market, some inflation and low interest rates. In the last year or so, many of those REITs have provided above average profits and now they are becoming a bit expensive. Yields are modest compared to the past and the payout ratios of several are streched. In other words, you may be buying high or near the top of the market and the risk of disappointment is high. REITs, utilities, pipeline and communication companies such as BCE are all priced at high PEs (prices that do not allow for any earnings disappointment). A trigger for a significant down fall may be increased interest rates and those, as discussed earlier, may not be that far off.

Finally, REITs such as Boardwalk and Main Street Capital are western based apartment operators. Oil prices may not have much upside in this economy and with new technologies North American markets may become oversupplied as happened with natural gas. Our markets are landlocked and with new pipelines to the West Coast and the Gulf of Mexico being the focus of much controversie, oil markets in North America may weaken significantly. This would undoubtedly also reflect in less Alberta jobs and rental demand, which in turn make investing in REITs such as Boardwalk riskier.

In my books, REITs, especially Western Canadian REITs, are a hold NOT A BUY.

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