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The logo for the Bank of Montreal is seen at its branch in Toronto.© Mark Blinch / Reuters

On Friday, BMO Nesbitt Burns real estate analysts Heather Kirk and Troy MacLean released their eight top real estate picks for 2017.

Before diving into individual names, let's have a look at their overall outlook for the industry.

They noted several headwinds for the group such as rising bond yields, earnings deceleration, and reasonable valuations.

Many investors in this sector are concerning with the rising interest rate environment. The analysts noted, "Although interest rates have risen materially from their bottom in 2016, a 10-year bond yield below 2 per cent remains supportive of real estate values and favourable for refinancing activity for the majority of REIT's".

They believe interest rates increases will be modest, given their moderate Canadian economic growth outlook. BMO's economics team is forecasting 2-per-cent real GDP growth for 2017 and 1.8-per-cent growth for 2018.

A second challenge highlighted is the lack of earnings momentum.

"REIT earnings growth has been in a downtrend since 2012 and moved into negative territory in Q3/2016 (the third quarter of 2016) due to slowing organic growth, capital recycling, declining interest rate savings on debt refinancing, and higher capex spending."

That being said, they do expect some resumption of earnings growth in the second half of this year.

Valuations are also a concern with the group trading close to the long-term average.

The analysts favour real estate securities with solid earnings growth forecast. Listed below are their top picks for 2017, broken down by their respective exposures.

Apartments

For investors looking in the apartment space, two REITs are recommended.

InterRent REIT (IIP.UN-T) has the larger expected total return of the two investment ideas. The analyst has a target price of $9, suggesting a potential total return of 27 per cent, which includes the yield of 3.4 per cent.

Killam Properties REIT (KMP-T) is the other top pick. The analyst has a target price of $13.50, implying a potential total return of 18 per cent, which includes the yield of 5 per cent.

Grocery anchored and diversified retail

Starting with the security with the highest forecast total return in this space is Slate Retail REIT (SRT.U-T). The analyst has a target price of $13 (U.S.). Combined with Slate's attractive yield of over 7 per cent, the anticipated total return is 28 per cent.

RioCan Real Estate Investment Trust (REI.UN-T) has an total forecast return of 20 per cent, which includes a 5.4 per cent yield. The target price is $30.

Rounding out the list is First Capital Realty Inc. (FCR-T), which develops and manages properties across Canada with a focus on retail properties located in urban areas. Among its largest tenants in terms of annualized minimum rent are Loblaws, Sobeys, Metro, Walmart and Canadian Tire. The analyst has a total expected return of 18 per cent, which includes a 4-per-cent yield.

Senior living

With a target price of U.S. $11.50, the analyst believes small cap stock, Mainstreet Health Investments Inc. (HLP.U-T) has 29-per-cent upside potential, including its attractive 7.8-per-cent yield.

Also making the list is the largest owner and operator of senior residences in Canada, Chartwell Retirement Residences (CSH.UN-T). The analyst is forecasting a potential total return of 16 per cent, which includes a 3.8 per cent yield.

Diversified

H&R Real Estate Investment Trust (HR.UN-T) holds a diversified real estate portfolio with 156 retail properties, 102 industrial properties, 38 office properties, 10 residential properties, and four development projects. The analyst has a target price of $26, implying a potential total return of 22 per cent, which includes a 6.2 per cent yield.