Canaccord Adams real estate analyst Shant Poladian has added his voice to the chorus of Bay St. commentators who maintain the real estate investment trust sector is undervalued.
"Looking for 20% plus total returns once [the] global credit market turmoil subsides," wrote Mr. Poladian in a note investors.
"Canadian property fundamentals are in the best shape we've ever seen and most of our stocks remain poised for healthy organic growth in 2008 and 2009. In our view the REIT sell-off is overdone."
He says recent stock prices are pricing in too large a correction for the drop in underlying property values based on recent real estate transactions. He believes REITs are trading at a 13% discount to net asset value, even after 25 basis point adjustment is made for capitalization rates, the implied rate of return on a property.
"We believe the REIT sector will eventually revert to trading at a modest 5% premium to net asset value, in line with its long-term historic average, which equates to a sector total return north of 20%," said Mr. Poladian, predicting 15% capital appreciation and 8% yield. In fact, he can see returns approaching 30%.
"We see a wall of capital sitting on the sidelines from private equity funds waiting in the wings, large institutional investors deploying capital following raising their real estate allocations, and individual investors eventually redeploying funds that are currently parked in money market investments," said Mr. Poladian.
Despite his bullish stand, the analysts says the turmoil in global credit markets warrants means investors should be defensive and focus on REITs with strong balance sheets, healthy organic growth profiles, strong performance track records and look to medium to larger cap companies.
Garry Marr
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