Looking At REITs

12/20/12 08:14:04 AM

by Koos van der Merwe

A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly.

Security: ZRE-T
Position: Accumulate

REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. Equity REITs invest in and own properties. Their revenues come principally from their properties' rents. Mortgage REITs deal in investment and ownership of property mortgages. These REITs lend money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans. Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.

In Canada, where REITS have become a good investment especially in these uncertain times, many investors will look at dividend reinvestment plans (DRIPs). Investing in REITs is a liquid, dividend-paying means of participating in the real estate market, and as property prices start increasing, looking at and investing in REITS has become a good investment strategy.

FIGURE 1: BMO EQUAL WEIGHT REIT INDEX, WEEKLY

Graphic provided by: AdvancedGET.

Bank of Montreal Equal Weight REITS Index shown in Figure 1 is a weekly chart and shows how the index developed a REIT index, the BMO Equal Weight REITS Index. Figure 1 shows how the index moved from a low of 14.86 on May 28, 2010, to a high of 21.34 by August 17, 2012.

The 50%-plus rise in the index is a very positive sign that housing prices are recovering. The relative strength index (RSI) on the weekly chart is still in a negative trend. The chart does appear to have broken out of a flag pattern, but the fact that the two lines of the pattern are not horizontal does suggest uncertainty. Nevertheless, the index should be watched. The index has also broken above the 20-period moving average, nothing serious, but a moving average that has proved itself in previous breakouts.

FIGURE 2: BMO EQUAL WEIGHT REIT INDEX, DAILY

Graphic provided by: AdvancedGET.

The daily chart in Figure 2 shows the flag that formed in the Elliott wave ABC correction. The index has broken out of the flag, as shown on the chart. The index has also given a buy signal on the JM internal band index, another positive. With the Elliott wave suggesting the start of a new bull trend, the index is suggesting that investing in REITS is a very sound strategy. The RSI is also showing strength, another positive.

Investing in REITS is a strategy that should be considered today.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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Looking At REITs

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