Canadian real estate investment trusts dodged a bullet in October 2006, when the federal Conservatives’ new trust tax policy excluded most REITs. But the sector hasn’t escaped the impact of the global credit crunch: the S&P/TSX Capped REIT index is down 18.3% from a year ago. That shouldn’t be surprising: there’s less capital available for real estate deals, which depresses property values. Some industry watchers are saying now is a good time to buy, yet the outlook for the sector remains uncertain.
Many REITs trade below the estimated value of their properties, says Michael Smith, an analyst at National Bank Financial, but he doesn’t see anything over the next three to six months that could create a jump in the sector. A real estate play that he does like is Brookfield Properties (TSX: BPO), a New York–based commercial real estate company that he thinks could possibly outperform Canadian REITs over the next year. He says Brookfield trades significantly below the value of its holdings, is well managed and attracts long-term tenants with excellent credit.
Karine MacIndoe, a BMO Capital Markets analyst, sees opportunities in apartment REITs: Boardwalk (TSX: BEI.UN), which owns buildings in Alberta and Saskatchewan; Canadian Apartment Properties (TSX: CAR.UN), which has begun to raise rents in Ontario and Quebec; and Northern Properties (TSX: NPR.UN), which has units in B.C., Alberta, Newfoundland and Nunavut, and offers a way to play commodities through real estate. Still, she says, “until we see a recovery in the financial landscape, REITS will continue to be under pressure.” Mark Rothschild, an analyst at Genuity Capital Markets, says Dundee REIT (TSX: D.UN), which holds properties in Western Canada, looks undervalued, and First Capital Realty (TSX: FCR), which isn’t a REIT, appears cheap. But he cautions against believing the REIT market has hit bottom: “We’ll really only know that in hindsight.”