CANADIAN REITs AT A DISCOUNT

I'll start this post with the disclaimer that I am far from an expert on REITs. I know little on these entities, but I am becoming more and more intrigued by the idea of adding dividend income to my portfolio. However, given Canada's gravity defying real estate market, I have thus far shied away from investing in REITs out of fear of a real estate correction.

Now I've come across a research piece from CIBC that states that Canadian REITs may be oversold. Here are some excerpts:

• Since mid-2007, Canadian REIT prices fell by almost 25%

• That is 10%-points more than the drop in the financial index and three times the drop n the TSX as a whole (Chart 1).

• When evaluated in relation to the net value of their assets, Canadian REITs are now trading at an unprecedented discount of almost 20%. That is three points deeper than the discount observed during the near-recessionary conditions of 2001 (Chart 2).

• REITs are extremely sensitive to swings in interest rates. Interest rates will continue to fall in the coming months due to central bank action.

• It would take a full-blown recession in Canada to justify current REIT valuations. Under any other scenario, REITs appear to be oversold.