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What corporate insiders are signalling about future returns for REITs

Those seeking to avoid exposure to market meltdowns by investing in trade volatility for scrutiny.

Kevin Van Paassen/The Globe and Mail

Real estate investment trusts have been a great place to park cash over the past several years, with many steadily gaining in unit price while simultaneously producing attractive income payouts.

Take the iShares S&P TSX capped REIT index ETF, for instance, one of the small handful of exchange traded funds in the sector. It has doubled over the past four years and is up 4 per cent during the last two months alone.

Winning investments rarely stay that way forever. So, understandably, investors are becoming increasingly concerned that the party may soon come to an end.

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But the latest actions by corporate insiders suggest the happy times will continue for some time.

"From an insider perspective, it seems few are heading for the exits," says Ted Dixon, CEO of INK Research, which monitors buying and selling of shares by executives and directors within their own businesses.

The number of real estate companies with insider transactions is relatively low right now, but that may be because of trading blackouts in effect amid the current earnings season, he says. And those REITs that are seeing insider activity are experiencing more key buying than selling.

INK's Residential & Commercial REIT industry indicator is at 200 per cent - meaning there are two stocks with key insider buying for every one with selling. It's a fairly bullish reading, albeit it comes on light volumes, notes Mr. Dixon.

The REITs that are seeing insider selling tend to be some of the larger players. Mr. Dixon speculates it could be because some of the larger sized REITs are finding it hard to identify growth opportunities on a suitable scale.

For REITs overall, insiders may still be interested in buying because interest rates remain low, making the generous payouts of real estate trusts relatively more attractive to investors when compared to bonds or bank deposits. Low rates also keep capital costs down at REITs.

It doesn't appear interest rates will be on their way up any time soon. Last week, Bank of Canada Governor Mark Carney suggested the bank's timing for a rate hike has been pushed back, due to slower-than-expected economic growth. Keeping rates low will aid the bank in preventing a deflationary environment and help prevent an undesirable slowdown in the housing market.

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"Going forward, we will be interested to see if bullish real estate sentiment levels remain intact once trading windows open up after earnings season," said Mr. Dixon. "We will also have to see if Mr. Carney's yet to be named successor is more inclined to raise the price of credit. A key sign post in 2013 will be what insiders do in light of the Bank of Canada's monetary stance in the post-Carney era."

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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