Daily Buy/Sell Advisor RealREIT turns into reality
The in-person RealREIT 2022, held at the Metro Toronto Conference Centre on Sept. 8, gave its attendees a welcome return to live conferences after a two-year virtual hiatus. What has typically been a full day of real estate promotion bordering on puffery was much more subdued this year given the economic and interest rate landscape.
In this column, we share some highlights and our takeaways for the multi-family space.
-A dour economic backdrop: With the theme of the kickoff presentation titled "Economic turbulence in a Canadian context," there wasn’t much in the way of positives for the forthcoming year.
Perhaps the lone upbeat note was that COVID restrictions have eased globally and the expectation is that they won’t rise again. With that comes easing supply chain problems and ultimately inflation.
Nevertheless, with inflation still high today, as well as aggressive monetary tightening, tougher financial conditions, fiscal drag, commodity shocks, Chinese headwinds, and the Ukrainian war all still looming, there are plenty of negative forces at work. As such, growth is expected to slow sharply into 2023, leading to a recession (estimated by the RBC economist at 70 per cent).
The Bank of Canada is likely to follow their latest 75 basis point hike with one or two more (aggregating into another 75 basis point increase) before possibly cutting in the second half of 2023.
All this sets the stage for a choppy backdrop for REITs where growth is essential to offset net asset value (NAV) erosion driven by capitalization rate expansion-driven. (Capitalization rates are calculated by dividing annual net operating income by total current property market value.)
Quality differentiation has become crucial again, and strong operators and capital allocation will be necessary given a rising cost of capital.
Industrial and multi-family the clear favourites
With almost the entire sector trading at significant valuation discounts, real estate has been out of favour this year. It was clear, however, that industrial and multi-family are where most are placing their chips in advance of a recovery.