“REITs win,” said Michael Smith, an analyst at Macquarie Equities Research who has spent the last five years comparing the cap rates of condo investment with the returns on apartment REITs. “What I would say now, since I did the last study, is if anything the outlook for the REIT versus the condo is even more compelling given where the condo market seems to be correcting.”
Early this year, his number crunching suggested REIT investors were won an average return of 31.5% over the past year. That’s more than double the return on a Toronto condo and five times that for a Calgary one.
Read the entire article in Canadian Real Estate Magazine (Aug 20, 2012)
Here’s an excerpt from a 2011 report from the same firm:
If an investor purchased a standard condo as an investment with a three-year holding period from January 2008 to December 2010 (while achieving average market rents), the investor would have realized a 31.7% decline in equity value.
In contrast, had the same investor purchased units of Boardwalk REIT, the investor would be up 8.4% – an absolute difference of 40%. The Calgary condo market demonstrates how investors can be susceptible to market volatility, which can be further compounded by a lack of liquidity when it’s needed most.
In their report entitled REITS vs Condos Part 2 (also from 2011), they noted that even in the current low interest rate environment rental income as a percentage of total return has declined. It lists Toronto as an example showing that total return had declined to 0.5% – 2% from mid to high single digits in the past. Meaning what exactly?
This means investors have to rely on capital appreciation to (sic) order to generate a return.
The above sentence emphasizes why some real estate investment gurus continually make such bullish average price forecasts while at the same time claiming to be unbiased.