National Post (National Edition)
Real estate
ASSET MANAGER SAYS LOOK ABROAD FOR BEST RETURNS IN 2017.
Canadian REITs will see “high single digits and low double-digit” growth next year, as robust demand in the East and a strong retail sector are offset by an office glut in Calgary, according to a new report from Timbercreek Asset Management.
Still, the better real estate investment opportunities lie outside of our borders, says Corrado Russo, senior managing director of investments and global head of securities at the Toronto-based firm.
He is particularly bullish on the U.S., with presidentelect Donald Trump’s progrowth policies expected to provide an economic bump.
“When I look at the choices outside of Canada, we’re just seeing better opportunity there,” he said.
At home, Canadian REITs with portfolios concentrated in major cities are a good bet for 2017, he says. Welllocated, convenience-oriented centres with grocery or pharmacy anchor stores will benefit from inelastic demand, he said.
However, there are sharp divides in the office market. Companies are relocating to Toronto to attract employees while demand in Calgary is contracting amid a drop in oil prices.
Calgary will benefit from an improving oil price environment after a recent production-cut deal between OPEC and non-OPEC member states, but the boom days will not return, he said. Major investments in infrastructure and machinery to capitalize on the oilsands have already been made, he added.
“The demand that was created in the last oil cycle, in the boom ... that was sort of a one-time effect,” said Russo.
Still, retail real estate in Calgary has been resilient, he adds.
“You would expect retail to also be suffering,” Russo said. “But I’m not seeing any significant signs of that ... The well-located urban shopping centres that are more convenience-oriented are fine.”
As well, multi-family assets in Canada will remain “attractive” next year with continued immigration, limited new supply, high ownership prices and stronger mortgage rules, Timbercreek added.
Globally, REITs are forecasted to deliver between 8.5 per cent and 10.6 per cent returns, Timbercreek says.
Russo dismissed concern about the vulnerability of REITs as interest rates rise, arguing that REITs have historically performed well in rising rate environments that are accompanied by improved economic growth.
REITs generated an average 14 per cent annualized return across the last nine rising interest-rate cycles over the past 40 years, Timbercreek’s analysis found.
Strong inflation and job growth results in more workers in office buildings, rising consumer spending and hotel demand, and a knock-on effect for commercial real estate, he said.
“People think real estate is sensitive, or correlated to interest rates,” Russo said. “It’s actually much more correlated to the economy. That’s really what drives real estate.”
In the U.S., Trump’s promises of lower corporate and personal taxes, higher infrastructure and defence spending and less regulation are expected boost economic growth, and in turn the office sector. However, the hotel sector will experience the largest benefit, given the historic correlation between GDP growth, corporate profits and revenue per available room at hotels, Timbercreek says.
What Canadian REITs have going for them, however, is high dividend yield and relatively low volatility in the sector, Russo said.
“People are still going to be starved for yield,” he said. “Just because rates go up 25, 50, 100 basis points, that doesn’t change the fact that there is still very competitive total cash flow that you get out of the Canadian REITs.”