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Riding the recent surge in Canadian stocks, Minto Apartment REIT priced its initial public offering at the high end of its marketing range, buoyed by exceptionally strong demand from sophisticated Canadian investors.

Minto set out in late May to raise $200-million. After a short marketing period, the real estate investment trust (REIT) attracted interest from many blue-chip Canadian institutions, ultimately drawing roughly $900-million worth of demand, according to people familiar with the deal.

More than two-thirds of the orders came from institutional accounts, and the vast majority were Canadian investors. Such strong demand from sophisticated investors suggests the REIT will perform well once it starts to trade, because the big buyers are often long-term holders.

The high demand emerged even though Minto’s units were priced with a dividend yield just under 3 per cent. Historically, REITs were purchased because of their fat distributions, but some larger investors are changing their preferences. In the real estate sector, they now like to see some more cash invested back into the business, to see the REITs grow.

This fundamental change comes as the real estate market evolves. REITs have long been known as income-producing securities, and they attracted a lot of interest in the first few years after the 2008 global financial crisis because they paid strong distributions as bond yields started to plummet.

But real estate fundamentals are changing, and REITs have realized they need to get into development. The likes of RioCan REIT and Allied Properties are now heavily involved in this type of activity – and RioCan even named its residential development head as its new chief operating officer, setting him up as the successor to current chief executive Edward Sonshine.

Amid this shift, Minto Apartment stood out because it set out to acquire 22 properties predominately located in Ottawa and Toronto from Minto Properties, which is a well-regarded private real estate owner.

The successful IPO is the second in as many months, with BSR REIT completing a US$135-million deal in late May – though Minto had much stronger demand.

The mere fact that REITs are going public again signals a major shift. Starting in 2013, investors had fears about rising rates, followed by economic shocks from the energy crash in Canada – and many REITs had exposure to Alberta.

Lately, though, certain classes of Canadian REITs have watched their valuations soar – particularly owners of industrial and multifamily, or apartment, properties. The rebound has persuaded issuers to explore IPOs.

Although underlying interest rates and bond yields are rising again amid strong economic growth, REITS have still performed well.

“We fully acknowledge that the current move in rates does tend to have a dampening effect on investor enthusiasm, and at the margin even small moves can impact sentiment and possibly shift invest preferences,” analysts at CIBC World Markets wrote in April of the REIT market. “However, we also believe that rates would need to increase significantly beyond current (or projected, for that matter) levels to represent a real alternative.”

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