Investors, who once earned 5 per cent on a one-year GIC, will look elsewhere for yield and may consider REITs, experts say.Kwarkot/AFP/Getty Images
Canadian real estate investment trusts (REITs) have struggled over the past three years amid rising interest rates and other headwinds, but they could be turning the corner.
With the S&P/TSX Capped REIT Total Return Index up 14 per cent this year so far, the sector could get a boost from falling interest rates, tight supply in certain markets and more takeover activity.
“We’re cautiously optimistic – it’s been a good start to the year, whereas last year, REITs were down 2 per cent,” says Lee Goldman, senior vice-president and portfolio manager at CI Global Asset Management in Toronto.
Canadian REITs, which may also have some exposure to the U.S. and Europe, took a hit in 2022 amid sharply rising rates, which increased debt costs and triggered competition from risk-free investments, such as guaranteed investment certificates (GICs).
Office REITS were hurt by the work-from-home trend driven by the COVID-19 pandemic. Multi-family REITs were affected by worries about Ottawa’s new immigration policy to reduce the number of permanent and non-permanent residents. And industrial REITs encountered some hesitant tenants because of tariff concerns.
But the Bank of Canada and the U.S. Federal Reserve Board both lowered their key lending rate by a quarter of a point on Sept. 17 – and there’s speculation more cuts could be coming.
“That helps longer-term bond yields come down as well, and that should be positive for the space,” says Mr. Goldman, who oversees CI Canadian REIT ETF RIT-T and its mutual fund counterpart.
Investors, who once earned 5 per cent on a one-year GIC, will look elsewhere for yield and may consider REITs, he says. The yield on a one-year GIC is now in the 2-to-3 per cent range.
For the most part, Canadian REIT fundamentals look decent, valuations are attractive, and the average yield is about 5.2 per cent, he says.
“It’s the second-highest yielding sector behind telecoms,” Mr. Goldman says.
He sees opportunities in retail REITs, which are mostly grocery-anchored shopping centres that can do well in various economic conditions, and where there has been a lack of new supply.
Mr. Goldman favours RioCan REIT REI-UN-T and First Capital REIT FCR-UN-T, which trade, respectively, at about a 10 and 11 per cent discount to consensus net asset value (NAV). RioCan, which also has a residential portfolio, has a 98-per-cent retail occupancy rate. First Capital has a 97-per-cent retail occupancy rate.
Valuations are also compelling in industrial REITs as their rents are back to more normalized levels after climbing sharply from 2018 to 2023, he says. He likes Dream Industrial REIT DIR-UN-T, which has properties in Canada and Europe and trades at about an 18 per cent discount to NAV.
Dean Orrico, president and chief executive officer at Toronto-based Middlefield Ltd., is bullish on Canadian REITs because of falling interest rates and more potential mergers and acquisitions (M&A) after recent deals.
“All that activity has been positive in bringing money back into the REIT market,” says Mr. Orrico, who co-manages Middlefield Real Estate Dividend ETF MREL-T and mutual funds with 80 per cent of their holdings in Canadian REITs.
InterRent REIT IIP-UN-T has struck a deal to be acquired by CLV Group and Singapore sovereign wealth fund GIC for $4-billion. Dream Residential REIT DRR-UN-T is being purchased by Morgan Properties LP. Both transactions have yet to close.
H&R REIT HR-UN-T, which owns residential, industrial, retail and office properties in Canada and the U.S., is also in play after receiving “unsolicited expressions of interest.”
U.S. investors are also regaining interest in domestic REITs as Canada’s population still appears relatively strong despite Ottawa’s immigration targets and because of the federal government’s more pro-business stance now, Mr. Orrico says.
He favours seniors housing REITs, such as Chartwell Retirement Residences CSH-UN-T, Sienna Senior Living Inc. SIA-T and Extendicare Inc. EXE-T, despite their run-up this year. The latter two still trade at about 5 and 10 per cent discount to NAV, respectively.
There is significant demand from aging baby boomers, but seniors’ housing is limited, he notes.
“It’s extremely challenging to build a new retirement home and charge rents that are economic,” Mr. Orrico says.
He also likes retail REITs, such as First Capital REIT, RioCan REIT and Choice Properties REIT CHP-UN-T, the main landlord to Loblaw Cos. Ltd. Choice Properties trades at a 10 per cent discount to NAV.
Michael Missaghie, president and portfolio manager at Toronto-based Arch Corp., is also upbeat on Canadian REITs because of attractive valuations and M&A potential.
“The runway for real estate over the next 24 to 36 months is going to look very good,” says Mr. Missaghie, who runs Arch Anson Tactical Real Estate Fund, which is invested 50 per cent in Canadian REITs.
He favours multi-family REITs despite immigration headwinds. This sector benefits mostly from older buildings being renovated to increase their value, but charge mid-market rents, he adds.
The InterRent deal indicates that private capital is interested in “value-added real estate” trading at a substantial discount, says Mr. Missaghie, who led an investor activist campaign for change at InterRent.
Multi-family REITS, he says, will gain more attention as investors become less concerned about immigration targets because of pressure to get skilled workers in areas such as health care and construction.
The rise in condo rentals resulting from weak resales is unlikely to impact the lower-rent, apartment REITs, while Ottawa’s new program to build affordable housing is “in the early stages,” he adds.
He likes Minto Apartment REIT MI-UN-T, which has exposure to Canada’s biggest markets, including Toronto and Ottawa. It trades at more than a 30-per-cent discount to NAV.
He also likes Chartwell Retirement Residences in seniors’ housing, saying he expects it will see 15 per cent cash-flow growth in 2026.
“The best time to look at real estate is when it is being ignored by other investors,” as interest rates drop and the public REITs are trading below NAV, he says.
“REITs historically give an 8-to 12-per-cent return, including distributions, on average annually,” Mr. Missaghie says. “The only way you’re going to outperform that number is by buying real estate at a discount and getting capital appreciation over that time period.”