The Way Ahead for REITS Our favourite REITs include DIR.UN, CAR.UN, GRT.UN, and IIP.UN. Dream Industrial and Granite are involved in the industrial space which we feel has a lot of room for growth, while Canadian Apartment Properties REITs and InterRent REIT are involved in residential real estate, which we feel there is a lot of underlying demand for.
Real Estate has been one of the worst-performing sectors of the North American markets over the past couple of years, alongside a rising interest rate environment. Rising interest rates have three primary negative effects on REITs - the first is competition for yield, investors now have another source (bonds and GICs) of solid yield rather than looking at just REITs and dividend stocks. The second effect is rising interest rates cause interest expenses for REITs to rise, thereby compressing margins. The third effect is a higher capitalization rate on REITs' properties, which causes their property values to decrease on the balance sheet, making its financial position temporarily weaker.
The thesis for REITs to perform well going forward is that a lot of these negative effects have taken place and are priced into the real estate sector of the market. Investors are fairly underexposed to real estate, and when interest rates peak and the BoC holds rates steady, we should see bond yields decline, which would lead to the easing of interest expenses for REITs (expanding margins), easing competition from yield-seeking investors (bonds will offer lower yields), and a reduction in the capitalization rate, thus boosting property values on REITs' balance sheets. We also see REITs as being well-valued which helps the investment case. (5iResearch)