REIT bonds offer alternative real estate exposure
Rob Carrick, G&M
Dec 31, 2013
The big decline in REIT prices in 2013 has alerted investors to the risks of holding these popular income-focused stocks.
But there’s another way to invest in real estate investment trusts with somewhat less risk – through their bonds. The Canadian corporate bond market is far from stellar in the variety of offerings for investors seeking yields well above government bonds. But there’s still a decent selection of REIT bonds available through online brokerage firms, and the yields are attractive.
A search of one broker’s online bond database found bonds from such REITs as Cominar, Calloway, H&R, RioCan, Dundee, Choice Properties, Granite and Morguard. All are investment grade, with credit ratings of BBB (high), BBB or BBB (low). An example of a BBB (high) rated bond is the RioCan 2.87 per cent bond maturing March 5, 2018. The yield in mid-December was 3.15 per cent, which compared with 1.8 per cent for a five-year Canada bond.
With the incrementally higher risk of the BBB-rated 4.9 per cent H&R bond maturing Feb. 2, 2018, you get a yield of 3.34 per cent. Rated BBB (low), the 3.42 per cent Dundee bond maturing June 13, 2018, offers a yield of 3.54 per cent.
If the economy holds steady, the risk of outright default on REIT bonds like these is minimal. But there’s certainly a risk of price declines if interest rates keep rising. Rising rates happen to be the big reason why REIT stocks fell sharply in 2013; REIT bonds are vulnerable, too, but not as dramatically.
Frankly, price declines on individual bonds that will be held to maturity of no real consequence. In fact, the very conditions that send interest rates higher are actually good for REITs. More vigorous economic growth means lower vacancy rates and more leverage for landlords to raise rents.
Don’t overexpose yourself to REITs, though. If you have a significant position in REIT stocks, go easy on REIT bonds. And never hold the bonds of a REIT whose shares you own. You don’t want the fixed income and equity sides of your portfolio to both go down because of problems with a single company.