Q&A: Will the real estate bubble burst?

Question: Riocan Real Estate Investment Trust has done well lately but I’ve heard warnings about a real-estate bubble that could burst, sending realty stocks and investment trusts tumbling. If that happens, are distributions likely to be affected? I bought Riocan for income, not capital gain, and would like to hold it for the long-term. – R.R.

Gordon Pape’s answer: Real estate bubbles have burst before, with the last big collapse occurring in the early ‘90s. At the time, REITs were severely affected, but open-end real estate mutual funds were hit even harder.

Certainly, distributions could be at risk if that should happen. But keep things in perspective. It’s the residential market that is hot in some parts of the country right now. Commercial property is less affected. Riocan invests mainly in shopping malls. The greatest impact on their distributions would come from such factors as a deep recession, when tenants can’t meet the rent, and high interest rates, which would add significantly to their cost of carrying mortgages on the property. These are the things that should concern you more. If you see either situation deloping, you may wish to sell.

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