REITs zoom on boomer demand, but clouds may loom

Sun Nov 7, 2010 10:45am EST
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By Pav Jordan

TORONTO (Reuters) - Soaring demand for Canadian real estate investment trusts has driven sales of new equity to pre-crisis levels, boosting bankers' paychecks but stirring fears the popular products may be vulnerable to a downturn.

A combination of ultra-low interest rates and yield-hungry baby boomers seeking a haven for retirement savings has fueled the surge, with REITs raising more than C$2 billion ($2 billion) year-to-date in secondary offerings.

"What's driving them?" said Karine MacIndoe, a real estate analyst with Bank of Montreal. "An unbelievable hunger for yield ... what they can get on comparable Canada bonds, corporate bonds, other yield options, has made REITs look pretty attractive."

Bonds yields tumbled after the financial crisis as the central bank slashed rates to a record low in a bid to revive the economy. The Bank of Canada has since nudged its key rate up to 1 percent, but is expected to keep it there well into 2011. <CA/POLL>

As result, Canada's benchmark 10-year bond now yields just 2.85 percent. By comparison Calloway Real Estate Investment Trust CWT_u.TO, which specializes in renting out retail and mall space, yields 6.3 percent.

REITs are taking advantage of investor appetite to raise capital for acquisitions that can be easily financed in a low interest rate environment, another factor in the near perfect storm for trusts.

In October alone six secondary offerings by REITs, ranging in size from C$23 million to C$130 million, raised some C$500 million.

REITs have also raised more than C$800 million in initial public offerings this year, and still more in debentures, according to Bank of Montreal.   Continued...