September 23, 2016 / 8:52 PM / a year ago

Investors in Canadian REITs favor niche sectors after rally

TORONTO (Reuters) - Investors in Canadian real estate investment trusts (REITs) say they are looking to niche sectors like industrials, multifamily housing and senior housing, given the group’s strong run in 2016 and the longer-term risk of increases in interest rates.

A jogger runs along the seawall in Stanley Park with the city skyline in the background in this June 24, 2003 file photo. REUTERS/Andy Clark/Files

Canadian REITs, popular with yield-hungry investors because of their regular payouts, have gained 13 percent this year, helped by a sustained period of low interest rates.

“They’re a touch more expensive since the start of the year, but they’re pretty reasonable versus the broader market,” said Wilson Magee, portfolio manager at Franklin Templeton Investments, referring to shares of both U.S. and Canadian REITs.

Magee favors REITs serving industrial, office and some types of retail customers. Industrial REITs have exposure to the rise of e-commerce companies, such as Amazon.com (AMZN.O), that need warehouses to ship products.

Canadian REITs took a hit in the summer over worries about the prospect of U.S. interest rate hikes, which could hit yield-sensitive investments globally. The Federal Reserve is expected to raise interest rates by the end of the year.

“The market is priced for a December rate raise. If that changes, there could be a selloff,” said John Stephenson, president of Stephenson & Co Capital Management.

The money manager’s holdings include retail focused REITs like RioCan (REI_u.TO) and Slate Retail (SRT_u.TO), as well as WPT Industrial REIT (WIRu.TO).

Other Canadian industrial REITs include Pure Industrial AAR_u.TO, Dream Industrial (DIR_u.TO) and Granite (GRT_u.TO).

Northland Wealth portfolio manager David Cockfield said he favors residential REITs over other subsectors and is less concerned about the rate issue.

“I don’t see rates racing up anytime soon. The sector does have rate-exposure, but it’s one of the few places you can get a decent yield,” he said.

A recent change to the Global Industry Classification Standard used by major index providers gave REITs, which were part of financials, their own category. Major fund managers are now expected to give closer consideration to the space.

“The GICS classification is raising the sector’s profile. We’re seeing more fund flow globally into real estate,” said BMO analyst Heather Kirk, whose top picks include Pure Industrial and Toronto-listed Milestone Apartments REIT MST_u.TO. 

Dallas, Texas-based Milestone’s residential properties target blue collar workers across the U.S. southeast and southwest.

“We’re appealing to the broadest segment of the rental population,” Milestone CEO Robert Landin said in an interview at the BMO Capital Markets real estate conference in Chicago.

He said Milestone was eyeing acquisitions in its focus geographies.

Reporting by John Tilak; Editing by Chris Reese

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