Yield-hungry investors just might want to take a look at Real Estate Investment Trusts (REITs).

The trusts, as well as real estate operating companies, could generate returns of 15 per cent to 25 per cent - one-third yield and two-thirds capital appreciation - during 2010, said Shant Poladian, an analyst with Canaccord Financial Corp.

“We are at the early stage of the real estate cycle,” he said. Even though a recovery in real estate typically lags the economic recovery by 12 to 18 months, “[we] would not use this as an excuse to remain on the sidelines.”

Vacancy rates should decline with an improvement in employment, while the lending conditions should become more competitive as debt and equity markets improve, paving the way for lower financing costs and acquisitions, according to Canaccord.

The top investment ideas in the large capitalization sector are Brookfield Properties Corp. (target price: $17.25 U.S.), Canadian Apartment Properties REIT (target price: $17.25 Canadian) and H&R Reit (target price: $17.25). The top mid-cap pick is Artis REIT (target price $13).

The REIT sector is currently trading at a 3 per cent discount to the estimated pre-tax net asset value estimates, Mr. Poladian said. “In stark contrast, history shows that the REIT sector trades at a healthy premium to the net asset value [of around 10 per cent] once the early stages of an economic recovery are in sight.”

Despite the recovery in REIT prices during 2009, prices are still 39 per cent below the peak levels of the REIT index in early 2007. At their highest level the funds were trading at 16-18 times their adjusted funds from operations, compared with 11 times currently.

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Source:  Globe Investor | December 14, 2009