REITs offer alternative returns: the RealFund REIT has achieved impressive growth

Money Digest, August, 1997 by Ted Canning

One alternative investors may want to consider, within the context of their investment plan, is REITs. A REIT is a pool of capital that invests in both mortgages and property. The holdings may include apartment buildings, shopping malls, office towers and industrial parks. Most are managed like a fund, in that a professional manager makes ongoing decisions about the portfolio of investments.

With medium and long-term interest rates expected to go sideways for the next couple of years and positive real estate fundamentals, REITs have the potential to generate reasonably attractive returns going forward.

REITs offer an interesting alternative to direct investment in this category because you don't have to arrange a $100,000 mortgage and you don't have to call the plumber yourself to go and fix the pipes at one of the buildings. In many cases, income flows are quite attractive (over 7%) and much of that income is tax deferred. Most REITs are publicly traded. The advantages when compared to conventional real estate holdings is that they are smaller, liquid investments that are priced daily.

The issue that intrigues me is the RealFund Real Estate Investment Trust (TSE: RFN.UN, $16.00, 52 week hi/low: $18.25/$12.95, Yield 7.69%). RealFund is Canada's largest REIT at about $400 million and has consistently achieved impressive growth in assets and distributions. The main reason for this is its ability to generate yields from investments well in excess of financing costs.

RealFund's pricing has been the least volatile of the major REITs. The primary focus of RealFund is high-quality, community-sized, food-anchored shopping malls. However, there is solid diversification of assets in the REIT's property portfolio, with malls account for 60%, industrial properties 18% and office properties 22%.