Commercial REIT investment pay big dividends

The Standard & Poor’s /TSX Capped REIT Index has climbed to within 0.2 percentage point of a March 13 peak of 162.75, the highest level since July 200. Fuelling the growth has been dividend yields almost twice the average for the S&P’s/TSX Composite Index.

The investors in properties from shopping centers and office buildings to rental apartments have benefited as the 10-year bond yield fell by more than half, boosting the value of their holdings.

The Bank of Canada, while keeping its benchmark interest rate at 1 percent, confirmed last week that the consumer debt burden is among the country’s biggest domestic risks, and higher interest rates “may become appropriate.” Property prices in Toronto and Vancouver have almost tripled over the past decade.

While these concerns may lead to restrictions on real estate financing, the government’s efforts to curb consumer debt may work in favor of REITs that own rental apartments, says Brad Cutsey, an analyst at Dundee Securities.

“It sounds like all policies are geared towards tightening underwriting standards,” said Cutsey. “That makes it harder for first-time homebuyers to purchase. They’ll stay in the rental pool longer.”

Office property values probably will rise 20 percent this year in Calgary and about 10 percent in Toronto and Vancouver, according to CoStar Group Inc. (CSGP), fueled by a boom in the oil and gas industry.

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