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August 19, 2021

Mortgage investment corporations could be in for a fall: report

If you are like most investors hungry for yield, you likely have at least one real estate investment trust stashed away somewhere.

The shine has come off REITs recently, however, as bond yields have started to tick upwards. This has  prompted prospective buyers to worry about the impact that rising rates will have on REITs mortgage costs down the road.

Despite this, yield starved investors are hoping that mortgage investment corporations won't be hit in the same way. But tread carefully here, warns Hamilton Capital Managers analyst Rob Wessel in a recent report. Most MICs are riskier than you might think.

Unlike REITs, which buy income-producing properties and then use the rents to pay distributions to investors, MICs are generally more interested in funding land development and real estate construction, and they attract retail investors by offering much higher yields as a result, often in the range of 7 to 8 per cent.

A typical borrower might be someone who owns a multi-residential property owner and needs short-term cash for construction, for instance -- a loan the big bank simply can't be bothered with.

Wessel's worry is that if there's a hard landing in the Canadian housing sector, the losses that MICs experience could be material.

But that's not neccesarily the case, argues Andrew Jones, Managing Director, Debt Investments at Timbercreek Asset Management, which runs two large public MICs that have performed fairly well up to now.

In speaking with Canadian Mortgage Trends, Jones offers a primer on what to look for, particularly if you're considering investing in one of the smaller private offerings (i.e., not his) that keep popping up.

Have you invested in a MIC? Are you satisfied so far? Are you worried about the future when interest trates start to rise?

By Gordon Powers, MSN Money



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...