In all five periods an equally-weighted REIT portfolio outperformed an equally-weighted condo portfolio
REITs can be sexy, too
How would you like a nice 14% average total return each year for the past decade from your real estate holdings?
Before you rush out and start looking for something in the red-hot condominium sector, you might want to take a quick glance at the Canadian real estate investment trust sector.
REITs may lack the sexiness of floor to ceiling glass windows with views of the skyline but they have something else to offer ? a return that continues to the outpace the housing market even as residential prices stand at all-time highs.
Read the full story here.
Looking for an investment with sky-high returns? Forget the condominium in Toronto or Calgary and think about the real estate investment trust that owns apartments.
That?s the conclusion of Michael Smith, a real estate analyst with Macquarie Equities Research, in the fourth annual installment of his study comparing a REIT investment to a condo investment. The REITs have won every time.
The analyst compared the returns of Calgary condos to Boardwalk REIT, which is based in the city, and Toronto condos to Canadian Apartment Properties REIT, which is based in that city. He has now looked at five investment periods.
?In all five periods an equally-weighted REIT portfolio outperformed an equally-weighted condo portfolio,? said Mr. Smith. ?Looking at each market independently, REITs also generated superior returns every period.?
Over the first 10 months of this year, the condos returned 7.4% on equally-weighted basis while the REITs returned 21.4%. In previous years, the gap has been as much as 130.5% in favour of REITs.
Mr. Smith made a number of assumptions for his model. He acknowledged that condos are heavily leveraged, so to make for a fair comparison he assumed the REIT investments were partially made on margin. He used a 900-square foot condo for his example, included condo fees and prevailing mortgage rates.
For income, he used actual distributions from REITs and Canada Mortgage and Housing Corp?s latest rental market report for rental income. In terms of capital appreciation, he used Royal LePage?s annual house price survey to establish values for condominiums.
Mr. Smith says there some things he did not consider, which also tip the scales in favour of REITs. Those considerations include that transaction costs are much lower for selling a REIT than a condo. The trusts also over greater liquidity and diversification. You could also add in tax considerations, repairs and maintenance of a condo, and the downtime you face sometimes leasing your apartment and the gap widens.
?We think an equally important point to consider is the REIT investors can probably sleep a little easier at night without having to worry about carrying another mortgage, the odd bad tenant and the daily news flow of an impending condo price correction,? said Mr. Smith.
We think an equally important point to consider is the REIT investors can probably sleep a little easier at night without having to worry about carrying another mortgage
He thinks the future also looks brighter for the REITs to continue to outperform the condos.
?First, the condo market is laden with concerns of a correction due to elevated pricing, oversupply and high consumer debt levels,? said Mr. Smith. ?With the general perception that condo prices have peaked, it stands to reason that many prospective condo buyers will delay their purchase this putting additional downward pressure on condo prices.?
Those potential buyers are also good news for landlords like Boardwalk REIT and Canadian Apartment Properties REIT because it means more renters, helping put upward pressure on apartment occupancies and rent. That could mean even more income for REITs and better returns.
Source: http://business.financialpost.com/2012/10/25/reits-beat-condos-every-time/
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