Real Estate Investment Trusts should recover some of their capital in the second half of 2014 as investors realize current market prices account for rising interest rates. So says a banker from the only Canadian company that led a REIT purchase deal in the early part of 2014.
Recovery in the U.S. is taking time and bond yields have actually come back a bit, which is good news for the REIT,” says Justin Bosa, Canaccord Genuity’s investment banking managing director. “The space currently trades at a fairly attractive valuation.”
At the same time, the market remains volatile and many Canadian REITS experienced significant market losses last year. Some are considering copying the operating model used by REITS in the United States.
If one were to look at the U.S. model, one would see that REITS typically have lower leverage points, lower payout ratios and they produce effectively a lower yield,” says Bosa. “They have a lot of excess cash that they can redeploy into their portfolio and try and increase yields or cash flow.”
According to Bosa, Canadian REITS that want to emulate the U.S. model face a two-fold challenge. They themselves are younger and less-developed than their American cousins. They also compete in very different market conditions.
The U.S. is such a large and liquid market, U.S. REITS ultimately have a different investment base,” he says. “Their investors are pension funds, endowment funds and institutional funds that are longer-term thinking. Canada is a more retail-driven market that wants higher yields now.”
Note: This article appears on page 58 of the Spring 2014 issue of Canadian Real Estate Magazine.
