Wednesday, March 08, 2006

REITs, Good as Gold?

The Globe and Mail, Tara Perkins, 8 March 2006

Toronto — Prices for real estate investment trusts appear to be closely related to gold prices, an analyst has found.

In a report Wednesday, Scotia Capital analyst Himalaya Jain noted that REIT prices in Canada and the United States have been setting new highs in recent weeks.

Out of curiosity, Mr. Jain charted the relationship between the price of gold and the U.S. REIT index.

“Surprisingly, there appears to be a close relationship between the two,” he said.

Investors often turn to gold when prospects for the American dollar are weak.

The potential for further U.S. dollar debasement, concerns about inflation, and the rising appetite for hard assets are among the common factors driving investors towards both gold and real estate, Mr. Jain said.

“Critical among these is the perceived protection both of these assets offer against inflation,” he added.

“Since rents generally increase over long periods of time, real estate is viewed by many to be an ideal asset class, offering inflation-protected income, lower relative volatility, and net asset value support from hard assets.”

Despite the common factors, Mr. Jain suspects much of the correlation between gold and property prices is coincidental, “even though long-term Wal-Mart leases could easily be mistaken for gold.”

And he says that, “under most measurements, the U.S. REIT sector looks expensive.”

“We believe the Canadian REIT sector, currently trading at a relatively comfortable 200-basis-point spread to 10-year Government of Canada bond yields . . . offers better relative value than the U.S. — even after considering higher payout ratios amongst Canadian REITs,” Mr. Jain said.

His report came as the Institute of Canadian Real Estate Investment Managers reported that the rate of growth in capital values more than doubled last year, pushing the total return on real estate in Canada to 18.7 per cent, from 13 per cent a year earlier.

Retail was the strongest sector, with a total return of 21.4 per cent. Offices posted an 18 per cent return — nearly double that of 2004 — while industrial came in at 17.6 per cent.

Returns on residential rental properties, like apartment buildings, lagged at 9.9 per cent.

Activity has heated up in Canada's REIT sector in recent months, and analysts are expecting a round of consolidation soon.

National Bank Financial analyst Michael Smith has said he expects 2006 to be “the year of consolidation” for Canada's real estate investment trust sector.