Scotiabank Scotiabank real estate analyst Mario Saric offered his year-ahead outlook for his sector,
“With the probability of a recession rising (70% in October vs. 40% back in July, according to Conference Board of Canada), we point out that historically REITs have matched the benchmark heading into a recession, underperformed during the recession, and then started to outperform meaningfully approximately six months post-recession trough. This time, Canadian REITs have lagged heading in, which may help 2023 total returns, but we still believe better economic clarity and lower credit spreads are needed for REITs to outperform… Corporate bond yields tell us there could be more pain to come. While Canadian REITs may look very enticing on NAV estimates, they look less appealing on a spread to both Canadian BBB corporate yields and the 10-year Government of Canada yield … We’re positioned more defensively heading into 2023, but be prepared to go onto the Power Play (per unit growth) … Industrial and Senior Housing REITs will deliver the best FFOPU [funds from operations per unit] growth, with Industrial and Apartments delivering the best SPNOI [same property net operating income] growth; historically these are the key drivers of Canadian REIT unit prices (along with NAVPU growth). Our top Growth picks are BAM, IIP, TCN, SVI, GRT, and MHC. Our top Value picks are AP, BAM, CAR, REI, HOM, ERE, and DRR. Our Top Income picks are AP, CRR, CHP, and CRT”