Is It Time To Get Out of REITs?

Will increasing interest rates hurt REIT investors in the near term?

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The Motley Fool

Since central banks around the world dropped interest rates to nearly zero during the aftermath of the financial crisis of 2009, investors have been waiting for interest rates to go back to normal levels. We’re now officially five years past the Great Recession, and we’re all still waiting.

We keep hearing the same refrain. Interest rates have to go up at some point. Once the economy recovers a little bit more, then perhaps rates will start to normalize. Pundits often predict that rates will jump in 2015, as the U.S. Federal Reserve finally starts feeling comfortable enough to start tightening monetary policy.

I’m not sure I’m on board with what everyone else thinks will happen. I think rates could continue to stay low.

A slight history lesson

During the mid-to-late 1940s, the economic picture was pretty similar to today. Governments had spent heavily to finance World War II, and once soldiers returned home, many either went to school or were underemployed. It’s hard to turn an economy so focused on war production around quickly, so economic numbers were somewhat tepid.

Governments also had a lot of motivation to keep interest rates down. Debt levels were the highest they’d ever been. Many governments took advantage of low rates to pay down debt, especially with giant war expenses coming off the books.

Because of these factors, low interest rates persisted for over a decade. The latter half of the 1940s and the beginning half of the 1950s offered government bond yields pretty comparable to today’s numbers. If things play out like they did 60 years ago, we could be looking at low rates for years longer.

About REITs

I see a lot of similarities between economic conditions in the early 1950s and today. Growth is happening, but it’s not spectacular. If rates start to creep up, they won’t be able to go up a whole lot before growth starts getting pinched.

If rates continue to stay low for years, REITs will remain a terrific place to be. Investors looking for income will need to get paid from somewhere, and REITs are some of the most secure dividend payers on the market.

Take, for instance, Dream Office REIT (TSX: D.UN), Canada’s largest office building owner. The company has some of Canada’s largest companies as tenants, who aren’t about to start bouncing rent cheques. It also hasn’t missed a dividend payment since it started paying one, back in 2007. The stock currently yields 7.6%.

Investors looking for a more diversified REIT should take a look at Artis REIT (TSX: AX.UN), which has retail, office, and industrial buildings spread across North America. The majority of its holdings are located in Alberta, where the strong economy is helping it push through rent increases.

Plus, Artis is cheap. Shares yield almost 7%, and the company trades at a discount to its net asset value. Based on its discount to NAV, Artis is one of the cheapest REITs on the TSX.

Investors looking for residential REITs should take a look at CAPREIT (TSX: CAR.UN), which is one of Canada’s largest apartment REITs.

But CAPREIT isn’t just apartment buildings. The company also owns some commercial space, and also owns 29 manufactured home parks, scattered across the country. It has reasonable debt levels and yields more than 5%.

Unlike most REITs, which are very steady businesses, CAPREIT is a solid growth story. Revenue is up nearly 50% since the end of 2010, and the company has hiked its dividend twice since 2012. If Canada’s real estate market really starts to suffer, demand for the company’s rental suites could stay strong, especially if people don’t want to buy houses anymore.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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