A sure way to make money in real estate in 2007 doesn’t necessarily involve buying houses. Some suggest real estate investment trusts, which use the pooled capital of many investors to buy and manage leased properties.

With interest rates expected to remain low, there is little danger that inflation will erode the purchasing power of REIT payments, which come from tenant income.

“The REIT market is really the only equity market in Canada for real estate and, in our view, as far as income-producing vehicles, there’s nothing better in Canada,” said Dean Orrico, a Toronto-based managing director and portfolio manager at Middlefield Capital Corp.

“There is stable cash flow, very little development risk, a modest level of leverage, and they’re well-run.”

Managers such as Mr. Orrico are bracing themselves for a mergers-and-acquisitions shakeup in the industry in 2007. The unit price jumped for Alexis Nihon Real Estate Investment Trust after it agreed to be purchased by Cominar REIT this month. Alexis invests in office, retail and industrial properties in Quebec.

Also this year, Retirement Residences REIT unitholders saw a $2.8-billion takeover offer by the Public Sector Pension Investment Board. In addition, investors saw the $2.1-billion purchase of industrial landlord Summit Real Estate Investment Trust by ING Real Estate Investment Management Australia Pty. Ltd. and its Dutch parent company.

“I wouldn’t be surprised, if you fast-forward five years from now, [to] see half as many REITS as you do now,” Mr. Orrico said. “Canadian real estate on a global basis continues to be attractively valued.”

Mr. Orrico sees several possible takeover targets for 2007. He is considering purchasing Canadian Apartment Properties REIT, which pays investors income from rental apartments.

He already owns another rental income play called Boardwalk REIT, which he expects may make an offer for Canadian Apartment Properties REIT.

“One thing you may see happen here is Boardwalk takes over CAP REIT,” he said. “The condo market certainly affects our Canadian apartment REITs; with interest rates being so low, the guy renting can afford a condo mortgage. So there has been a slowdown in performance in multi-unit rentals.”

Other potential targets, he said, include Canadian REIT, a well-diversified company with no major shareholder, RioCan REIT, and IPC U.S. REIT, which owns U.S. mid-market office properties.

Rossa O’Reilly, managing director of institutional equity research, and investment analyst for the real-estate sector at CIBC World Markets, is also tuned in to the takeover buzz.

“It’s easier to identify a clear trend towards institutional demand for properties,” he said. “We wouldn’t argue that one should invest based on that — that would be the icing on the cake — but the main reason is income growth and potential capital appreciation.”

Lower long-term interest rates are going to keep real estate companies in vogue with investors, he added.

His list of picks includes RioCan, Crombie REIT, and H&R REIT. The first two own shopping centres, while H&R manages office, industrial and retail holdings.

Even amid expected consumer spending slowdowns in the United States in 2007, REITs that own retail properties would still collect the rents needed to make the payouts, particularly if the properties house business basics such as food, hardware and banking, he added.

Payouts may be the main reason to hold REITs into 2007, said Charles Dillingham, portfolio manager with Morguard Financial Corp., who manages the $69-million CIBC Canadian Real Estate Fund.

He holds about 10 per cent cash in the fund, instead of the normal 1 or 2 per cent, because he is expecting some price weakness early in the year and will buy more REITs then. He is interested in picking up some RioCan, Dundee REIT, Calloway REIT, Cominar REIT and Extendicare REIT.

Special to The Globe and Mail