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REITs back in the black, but growth will be tough

A RioCan centre in Kingston, Ont.

While real estate investment trust investors have something to look forward to as the companies they own look to return to positive earnings after a weak quarter, the companies themselves are facing uncertain futures as the economy struggles for growth.

Dozens of REITs will report their third quarter results in the coming weeks, and RBC Dominion Securities Inc. analyst Neil Downey said the companies should "mark a return to positive territory" after slipping back over the summer.

"Reflecting expected improvement in operating results, capital deployment and interest rate savings on debt refinancings, we continue to see a return to earnings growth in 2011 (three per cent) and 2012 (six per cent) versus 2010's decline of 1 per cent," he said.

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Calloway REIT has already reported and came in better than analysts expected. But as Alex Avery at CIBC World Markets points out, while the companies continue to have access to funding, they may find it increasingly difficult to grow through acquisitions.

"Competition for marketed properties is intense," he said. " [Other]risks include the potential for an unanticipated increase in interest rates, unexpected deterioration in economic conditions and diversion of investors' capital flows toward other asset classes."

Last week, PricewaterhouseCooper issued an industry survey that indicated that those who work in the sector are growing increasingly concerned that the good times can't continue indefinitely in the face of global turmoil. The companies like to grow through acquisition, but a two-year bender has largely exhausted the market.

The report asked 950 industry representatives in Canada, the United States and Latin America what they expected to happen in the 2012. It was the 33rd year for the Emerging Trends in Real Estate 2012. The Canadian respondents said "a big problem for the banks and large public pension funds is where to invest capital in the face of limited domestic opportunities."

That would drive foreign investors to look to more distressed markets for deals, the report suggested, such as the United States.

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