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Alarms Are Ringing in Real Estate: Time to Change Your REIT’s Position?

If you’ve been following the financial news, a global housing market slowdown in big cities around the world has some real estate commentators spooked. From domestic cities like Vancouver and Toronto to cities as geographically distant as Hong Kong and Melbourne, an apparently synchronized slowdown has prompted the IMF to theorize that global investors are starting to affect housing markets in a non-regional manner.

After going through the data for three of the main Canadian REITs (detailed below), it’s been reassuring to see how little their valuations have changed; however, with some ratios barely having budged since last year. This gives some indication of the defensiveness of such investments and ties in well with other key indicators of this characteristic, such as the size and spread of the assets that these trusts represent.

Furthermore, while house prices may have a direct effect on investments in that space, the following REITs relate largely to industrial real estate and should be relatively unaffected by a potential housing bubble. The main things to look for if you do want to invest, or indeed stay invested, in Canadian REITs are low debt, a healthy growth outlook, and decent valuation; let’s see how our list holds up.

Artis Real Estate Investment Trust (TSX:AX.UN)

Discounted by 41% compared to its future cash flow value, there are nice and low multiples for this REIT: a P/E of 7.6 times and P/B of 0.6 times to be exact. It falls down a little on debt, with a high level up at 94.9% of net worth, however.

A 12.4% expected annual growth in earnings is good to see in this kind of REIT, with a return on equity (ROE) of 8% last year indicating a fairly good-quality stock and a dividend yield of 5.84% making for a tidy passive income.

Morguard Real Estate Investment Trust (TSX:MRT.UN)

This classic retail, office, and industrial REIT is discounted by more than 50% at today’s prices, with a P/E of 12.1 times and P/B of 0.4 times displaying attractive valuation. A 21.4% expected annual growth in earnings over the coming couple of years should satisfy dividend investors who like growth.

The rest of the stats here are a bit different from those of the previous ticker: Morguard REIT’s debt level is lower at 83.9% of net worth, but likewise is its ROE at 4%. However, buying at today’s share price will lock in a much higher dividend yield of 8.27%.

Agellan Commercial Real Estate Investment Trust (TSX:ACR.UN)

An unincorporated, open-ended REIT currently trading at a discount of 42%, Agellan Commercial REIT has a lower P/E than its competitors on this list at 6.4 times, though a higher P/B at 1.1 times. Unfortunately, it also shows a reversal of fortunes, with a 3% expected contraction in earnings on the cards. A ROE of 17% last year does indicate fairly good quality, though, and a dividend yield of 5.75% pairs nicely with the lowest debt level on this list at 55.8% of net worth.

The bottom line

While a slowdown in the housing market may have deleterious effects on directly related investments, the REITs above offer a fairly insulated route for indirect gains from real estate; in short, there’s a big difference between owning real estate and being invested in a diversified trust. Agellan Commercial REIT is possibly the most risk-free of the three tickers listed above, with conversely the lowest debt and highest ROE.

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Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.

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