Are you catching a falling knife with REITs?

REITs are a subsector of the larger income trust sector, which includes energy, pipelines and other business trusts. REITs hold properties that generate income from leases and rents. These include things like apartment blocks, retirement & healthcare facilities, malls and commercial offices. Some of the companies included in the REIT index listed on the TSX are Boardwalk Equities (BEI.un), Calloway (CWT.un), Canadian Apartment Properties (CAR.un), Canadian Real Estate Investment (REF.un), Dundee (D.un) and Extendicare (EXE.un). This component of the TSX is relatively small in size making up about $27 billion in market capitalization.

On Friday December 5, 2008 the REIT index closed at a price of $71.04. The low over the past year was $64.84 reached on November 21, 2008 and the high was $144.62 reached last December. In the past three months I have not been able to infer anything from the technicals so I won’t start now. The chart does look like it has formed a downward trading channel with any rises bumping up against resistance long before the 50 day moving average. The most recent rise from the bottom on November 21st was only 5.5% which is better than the TSX at -.05% but falls short of the S&P 500 at 9.5%.

Further to Rob Carrick’s article in Saturdays Globe & Mail, “REITs battered down to eye-catching levels”, where he outlines the challenges REITs face with the slowing economy. I would also point out that REITs are highly leveraged to exacerbate the problems of financing he suggests they face. With a recession the component most likely to be ill affected is anything to do with mall or commercial offices as businesses see tougher times. There is a component that I would agree is worth looking at from a practical perspective and that is the apartment REITs. As he points out “demand for rental housing is more recession-resistant than other types of property.”

If you are exploring this sector because the price has dropped, I would be very selective given that this recession is a credit focused one. After all, as Dennis Gartman warns in his 22 rules of trading “never try to catch a falling knife.”