In what looked like a better deal for renters than residential landlords, the Ontario government announced on Tuesday that rents were going up in 2011...by all of 0.7 per cent. That's the smallest increase in the 35-year history of rent regulation in the province, turning a $1,000-a-month apartment into a $1,007-a-month apartment. Save those quarters!
But what does the tiny increase mean for real estate investment trusts that own apartments? It's not good news. However, in the case of Canadian Apartment Properties REIT , the units are enjoying a modest bounce on Wednesday after a recent losing streak.
Mark Rothschild, an analyst at Canaccord Genuity, continues to hold a bullish view on the units, which are recommended as a "buy" with a 12-month price target of $17.35.
Landlords are having a tough time raising rents on incoming renters (apartments tend to have a 30 per cent turnover in renters per year, and landlords can jack up the rent on newcomers) anyway, which means that the 0.7 per cent increase doesn't mean a whole lot.
But Mr. Rothschild is most enthusiastic about the valuation on CAP REIT, which is one of the largest residential landlords in Canada - particularly its capitalization rate.
"With new apartment properties trading in the private market at cap rates below 6 per cent, and older properties well below 7 per cent, we view CAP REIT's implied cap rate of 6.9 per cent as appealing," he said. "The units appear undervalued on a multiple basis as well."