Lower Cost of Capital Drives U.S., Canadian REITs

1/20/2011 | By Allen Kenney

Andrew Calderwood, portfolio manager of U.S. and Canadian REITs for Perennial Real Estate Investments, is generally optimistic about the listed real estate market in North America going forward. He discussed his take on the markets in an interview with REIT.com during REITWorld 2010: NAREIT's Annual Convention for All Things REIT in New York City in November.

Last year was the second-consecutive stellar year for U.S. REITs, and Calderwood said he attributes that performance to the lower cost of capital.

"A lot of investors were not expecting the weighted cost of debt for many REITs to be as low as it is today, and, at the beginning of 2010, for it to decline as much as it did," Calderwood said. "In my opinion, that is what has driven the U.S. REIT sector. We can see that in the very high correlations among many REITs."

Calderwood said we have not seen as much differentiation in performance among individual companies recently as we have historically.

However, Calderwood said he does expect some property types to stand out in 2011.

"I think short-lease terms and those REITs that can really take advantage of the green shoots of growth that we see at the moment are going to be the companies that can drive growth and ultimately those fundamentals will play out in the valuation," Calderwood said.

He added that certain sectors have strong secular growth as well. Calderwood highlighted data centers and hotels as sectors to watch in 2011.

As for the Canadian REIT market, which did not experience as much tumult as many other regions during the global financial crisis, Calderwood said the market looks good from a fundamental standpoint.

"From a fundamental standpoint it does look cheap and relatively attractive," he said. "Canadian debt is also very cheap. But moving forward, Canadian REITs don't have the ability to roll forward capital gains in a 1031 exchange, and that to a certain extent limits their ability to grow cash flows in the future. Some of that is inherent in the multiple discounts."

Calderwood said that the Canadian REIT market has come out of the crisis stronger than other regions, but he expects more of a GDP-type growth despite strong fundamentals. He said that compares to stronger growth forecasts for the U.S. market.