The Canadian real estate market remains under pressure as rental rates in Toronto and Calgary are falling and lagging lease agreements begin to show the effects of the recession.
In the second quarter of 2009, companies covered by Desjardins Securities showed a 4% decline in weighted year-over-year per unit/share growth, in large part due to the excessive losses at RioCan Real Estate Investment Trust (RIOCF.PK), the largest firm covered.
RioCan posted a 24% drop in its funds from operations per unit figures compared with the same period in 2008, due to losses on sales.
"As the effects of the recession begin to hit the bottom line of REITs/REOCs more significantly, it is not surprising that a cash flow decline is underway," Jeff Roberts, analyst, said in a note to clients. "We believe that many REITs are either fully valued or somewhat overvalued at current levels, and we would not be surprised to see a pullback in the next few months."
Property fundamentals are also a concern, especially in Toronto's office sector, the largest market in Canada. Net effective rents are now often less than $20 a square foot, as tenants are scarce and new buildings continue to spring up. Similar problems exist for the Calgary market as well, as job losses and property overbuilding are combining to drop rent levels.
Top pciks for Mr. Roberts includes Mainstreet Equity, with an estimated 32% return on target price, while Boardwalk REIT (BOWFF.PK), Parkbridge Lifestyle and Killam Properties (KMPPF.PK) are all rated Buy.