Michael Smith, a real estate analyst at Macquarie Equities Research, in the fourth annual installment of his study comparing a REIT investment in the apartment sector to a condo investment says the REITs are still way ahead.The Toronto-based analyst compared the returns of a Calgary condo to Boardwalk REIT, which is based in the city, and Toronto condos to Canadian Apartment Properties REIT, which is based in that city. He has now looked at five investment periods.
“In all five periods an equally-weighted REIT portfolio outperformed an equally-weighted condo portfolio,” said Mr. Smith. “Looking at each market independently, REITs also generated superior returns every period.”Over the first 10 months of this year on equally weighted basis, the condo investments returned 7.4% while the REITs returned 21.4%. Going back the full five years, the two condos have returned 10.4% on equally weighted basis, impacted heavily by price declines in Calgary. Toronto condos returned 41.5% over the same period. Still the REITs, when combined, have returned 74% over that five-year period.
Mr. Smith made a number of assumptions for his model. He acknowledged that condos are leveraged. He used a 900-square foot condo for his example, and included condo fees and prevailing mortgage rates. For income, he used actual distributions from REITs and Canada Mortgage and Housing Corp.’s latest rental market report for rental income for the condo. In terms of capital appreciation, he used Royal LePage’s annual house price survey to establish values for condominiums.Mr. Smith says there are some things he did not consider, which also tip the scales in favour of REITs. Transaction costs, for example, are much lower for selling a REIT than a condo. REITs also offer greater liquidity and diversification. Adding in tax considerations, repairs and maintenance of a condo and the downtime you face sometimes leasing your condo also widens the gap.
Sam Kolias, the chief executive of Boardwalk REIT, said he’s not surprised the REIT sector has won out again versus condos. “The valuation proposition is still more compelling than a condominium. The price of an average apartment versus a condominium, which is nicer, is still a wide gap. The total cost of renting versus owning all in is a wide gap,” said Mr. Kolias.So why do people keeping buying condominiums as an investment when they could pick up a REIT unit? Ben Myers, vice-president of Urbanation Inc. in Toronto, may have some answers. “People just like that idea of owning the bricks and mortar,” he says.
But the future may look brighter for REITs, if you believe the report. “First, the condo market is laden with concerns of a correction due to elevated pricing, oversupply and high consumer debt levels,” said Mr. Smith.
“With the general perception that condo prices have peaked, it stands to reason that many prospective condo buyers will delay their purchase, thus putting additional downward pressure on condo prices.”Those potential buyers are also good news for landlords such as Boardwalk REIT and Canadian Apartment Properties REIT because it means more renters, helping put upward pressure on apartment occupancies and rent. And if interest rates go up, it could increase demand for rental apartments. That could mean even more income for REITs and better returns.
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