Real estate sector braces for continuing losses
TheCanadian real estate market remains under pressure as rental rates inToronto and Calgary are falling and lagging lease agreements begin toshow the effects of the recession.
In the second quarter of 2009,companies covered by Desjardins Securities showed a 4% decline inweighted year-over-year per unit/share growth, in large part due to theexcessive losses at RioCan Real Estate Investment Trust, the largest firm covered.
RioCanposted a 24% drop in its funds from operations per unit figurescompared with the same period in 2008, due to losses on sales.
"Asthe effects of the recession begin to hit the bottom line ofREITs/REOCs more significantly, it is not surprising that a cash flowdecline is underway," Jeff Roberts, analyst, said in a note to clients."We believe that many REITs are either fully valued or somewhatovervalued at current levels, and we would not be surprised to see apullback in the next few months."
Property fundamentals are alsoa concern, especially in Toronto's office sector, the largest market inCanada. Net effective rents are now often less than $20 a square foot,as tenants are scarce and new buildings continue to spring up. Similarproblems exist for the Calgary market as well, as job losses andproperty overbuilding are combining to drop rent levels.
Top pciks for Mr. Roberts includes Mainstreet Equity, with an estimated 32% return on target price, while Boardwalk REIT, Parkbridge Lifestyle and Killam Properties are all rated Buy.
Canadian REIT, RioCan, Whiterock REIT and First Capital Realty are considered fully valued or overvalued and investors should move out of these holdings, he said.
Eric Lam
Financial Post