Rising mortgage rates have cooled a five-year run of acquisitions - and rising share values - of real estate investment trusts (REITs) in the residential market.
Share prices of residential-focused REITs show all have seen sharp declines since May when lending rates began to move upward. As of press time, the average for a five-year closed mortgage among the big Canadian banks was 4.26 per cent. This compares to sub 3 per cent rates a year ago for REITs that access Canada Mortgage and Housing Corp. insured mortgages.
Mortgage payments are the single largest cost for most residential REITS.
"It's all about interest rates," said REIT analyst Heather Kirk of BMO Capital Markets, "there is concern about where rates are headed."
The drop in share values - down an average of 13 per cent since May - is convincing some REITs to unload property.
Calgary-based Boardwalk REIT is among them.
"We believe Boardwalk shares are undervalued," said Bill Chidley, the company's senior vice-president, development, in explaining that Boardwalk plans to sell some of its assets and buy back its shares. As of press time, Boardwalk unit shares were selling for $58, down from $66 a year earlier.
Rumours are rife that Boardwalk is about to list some or all three of its high-rise concrete rental buildings in Burnaby and Surrey. "We have not determined which properties will be sold," Chidley said.
It would make sense to sell into the current Metro Vancouver market, said David Goodman, a multi-family property specialist with HQ Realty Services Ltd. Goodman notes that apartment building prices are at or near record highs, while capitalization rates are near historic lows. A price example: Goodman recently sold an old, 10-unit East Vancouver walk-up rental building for $185,000 per door and a cap rate of 2.1 per cent.
A pullback by REITs could further soften a Metro market that has seen a decline in sales and a rise in vacancies in recent months, Goodman suggested.
A complete report on REITs and the residential sector will be included in the September 2013 issue of Western Investor.
