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REITs still rolling on strong fundamentals

Low-cost debt, demand for income, demonstrated capitalization rate compression and REIT distribution increases have allayed some investory skepticism. In this photo, H&R REIT is planning to Acquire Two Gotham Center, a State-of-the-Art Office Tower in New York.

CNW Group/H&R Real Estate Investment Trust

If you had fears that the real estate investment trust market would cool, they should be long gone by now.

Skimming through the fundamentals, it's obvious that this market deserves to be strong. For how long? No one knows. But right now, absolutely.

Earlier this year, most people were skeptical about REITs going forward – not because they assumed REITs were overhyped, but because things like interest rate hikes would eat into mortgage costs.

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Fast-forward a few months and a lot of those fears have been temporarily assuaged. CIBC World Markets highlights some key points: low-cost debt, demand for income, demonstrated capitalization rate compression and REIT distribution increases.

Both low-cost debt and demand for income are a result of the Bank of Canada pushing back interest rate hikes, which means mortgages have stayed cheap and investors still have trouble getting yield elsewhere.

For cap rate compression, there was speculation that these rates were falling, but it all seemed anecdotal for a long time. Recent and upcoming transactions, however, prove that the real time transaction pricing still isn't accounted for in REIT valuations, so that should boost the trusts.

And then there are the distribution increases. After three years of few hikes, there have already been six in 2012, including H&R REIT, Brookfield Canada Office Properties REIT and Boardwalk REIT. There could be more, as analyst Alex Avery believes there's a good chance RioCan REIT and Killam Properties could follow suit.

Looking back at REIT performance since January, the average total return is 18 per cent, versus a loss of 1 per cent for the S&P/TSX Composite Index.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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