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Stocks Lure Property Investors: New Way to Buy Real Estate Has More Security
At all times, there is good real estate and bad real estate, but well-chosen real estate may be the best investment over time. ''The wealthiest people in the world have always made at least part of their money through investments in real estate,'' says Allen Parker, portfolio manager of the top-performing U.S. real estate fund.
And the new way to buy real estate is in a ''securitized form,'' says Parker, who manages the United Services Real Estate fund, based in San Antonio, Tex. In Canada, real estate stocks, limited partnerships and mutual funds allow relatively small investors to dabble in real estate without putting a lot of capital on the line. And they can buy into a portfolio of a calibre they couldn't normally access.
Even some conservative institutional investors, which used to make direct investments in real estate, are shifting their focus to indirect investment through stocks of real estate companies or stocks of companies rich in real estate.
Individual investors will find there is a shortage of publicly traded real estate stock in Canada. Institutions have grabbed large chunks of Toronto Stock Exchange-listed Bramalea Ltd., Cambridge Shopping Centres Ltd., Carena Developments Ltd., Consolidated HCI, Coscan Ltd., Revenue Properties Ltd., Royal LePage Ltd., and Trizec Ltd.
Individuals are also competing with institutions in the search for publicly traded companies with hidden real estate value. For example, the recent protracted takeover battle for food and real estate conglomerate Steinberg Inc. began as a real estate play. The losing bidder hoped to spin off the Quebec-based grocery chain and keep the choice real estate assets.
And the stock of small-capitalized Photo Engravers & Electrotypers Ltd. recently closed at an all-time high, largely because the print shop sits on a valuable 15 acres of Toronto real estate.
Another way to buy a piece of large real estate properties is through real estate limited partnerhips. Syndicators pool the financial resources of a number of investors in a limited partnership to acquire and manage real estate properties.
But real estate limited partnerships have recently come under fire - especially in the U.S. where a number of deals were put together that made no economic sense. ''Investors bought them because they threw off substantial tax losses,'' says David Freedman, partner at chartered accountants Laventhol & Horwath in Toronto. In Canada, the limited partnerships are less driven by tax considerations. Over the years, the Finance department has restricted their tax advantages, says Leonard Barkin, audit partner with chartered accountants Touche Ross & Co.
But there are still some problems with shaky Canadian partnerships. In the steamy market of the 1980s, many syndicators sprang up who had little or no track record in developing real estate or, equally important, in retaining good management to run their projects. A large number of deals were inadequately priced and structured, providing no cash-flow guarantees or containing poor quality buildings.
There is now a trend toward private syndications, set up by a group of associates or friends instead of syndication companies, says Dan Sullivan, executive vice-president and director at ScotiaMcLeod Inc.
The recently launched Global Strategy International Real Estate Securities Fund doesn't take direct ownership in land and buildings. Rather, it invests in international liquid securities such as shares, trust units and property income certificates. It will invest on a worldwide basis, favoring New York, London, Paris, Tokyo, Hong Kong and Sydney.
By contrast, the other real estate mutual funds offered in Canada have direct ownership in Canadian income-producing commercial real estate properties. The return on these funds include income as well as capital gains from the change in value of the underlying properties.
These funds differ from other mutual funds in three ways: they use borrowed capital as well as investors' capital to purchase properties, they're valued on appraisals, and they're less liquid than other funds.
The top-performing Canadian fund in terms of compounded annual return is Counsel Trust Real Estate. Its rivals include MD Realty A, First City Realfund, Guaranty Trust Property and Investors Real Property funds.
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