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Rising demand from foreign retailers and financial services firms trying to enter a still-tight Canadian market is boosting REITs. KILLAM PROPERTIES: HALIFAX: A Killam Properties trailer park in Eastern Passage, NS, August 27, 2010. (Paul Darrow for the Globe and Mail)PAUL DARROW/The Globe and Mail

It's not time to leave the REIT party just yet.

Investors have enjoyed heady times in real estate investment trusts (REITs), but several REIT experts suggest that moderate returns in the high single to low double digits are still on the horizon for the next year.

The scenario is not expected to be vastly different from this year, with the S&P/TSX Capped REIT Index generating a total return (distributions and capital gains) of 16.5 per cent so far, versus 5.7 per cent for the broader market.

Still, it's far cry from the 23-per-cent return in 2010 and 55 per cent in 2009, when the sector was recovering from deep declines during the financial crisis.

"REITs are still going to do very well, and will likely continue to outperform the TSX," said Dennis Mitchell, chief investment officer at Sentry Investments and REIT fund manager.

"We think a range of 8 to 12 per cent is realistic . . . If interest rates back up, REITs will correct. If the economy picks up steam, and cash flow growth accelerates, then REITs will do better." The continuation of low interest rates will help REITs when they refinance maturing higher-priced debt. Meanwhile, the trend of rising rents and additional development and redevelopment of properties will help boost cash flow.

The sector has been rebounding following a sell-off that began in August amid profit-taking on concerns about the U.S. "fiscal cliff," as well as a rotation by investors into other sectors such as bank stocks.

But the real estate industry got a lift last week when KingSett Capital Inc. proposed a $4.4-billion hostile bid for Primaris Retail REIT.

Market watchers say the REIT sector continues to be supported by strong fundamentals, with demand rising from foreign retailers and financial services firms trying to enter the Canadian market at a time when supply hasn't increased substantially across the country.

"The fact that we are in this low interest rate environment, while supply growth is relatively limited, has created a perfect storm for real estate," said Andy Nasr, a fund manager with Middlefield Group.

Here are three fund managers' top picks among REITs or REIT-like corporations:

Dennis Mitchell - Manager, Sentry REIT fund:

Calloway REIT

52-week range: $26.01-$31.25; yield is 5.5 per cent; Thursday's close: $28.39

The shopping centre REIT is attractive because it gets 25 per cent of its rent from retail giant Wal-Mart Canada, while 80 per cent of its assets are 10 years old or less, so "this is a new portfolio of real estate," he said. "The assets are primarily in the big six markets in Canada where the population growth is taking place … They continue to report very good results. It has a high-quality management team that owns 25 per cent of the REIT." He figures Calloway is worth $31.50 a unit.

Chris Couprie - Co-manager, First Asset REIT Income fund:

Pure Industrial REIT

52-week range: $4.05-$5.18; yield is 6.7 per cent; Thursday's close: $4.63

The REIT, which owns only industrial properties, has been on an acquisition spree and has been increasing cash flow, so it should be in a position to boost its distribution next year, suggested Mr. Couprie. Its former chief operating officer, Scott Hayes, resigned last summer to become chief executive officer of Dundee Industrial REIT. Dundee could be a potential buyer of Pure over time to gain more scale, he said. His one-year target is $5.25 a unit.

Andy Nasr - Manager, Middlefield ActiveIndex REIT fund:

Killam Properties Inc.

52-week range: $10.94-$13.60; yield is 4.7 per cent; Thursday's close: $12.22

The operator of apartment buildings and manufactured home communities, mainly in Atlantic Canada, will benefit from the $25-billion federal contract awarded to Halifax's Irving Shipbuilding Inc. that will create jobs and boost demand for rental units, said Mr. Nasr. Killam has also partnered with Islamic lender Kuwait Finance House to expand into the Ontario market. His one-year target is $13.50 a share.