Canaccord Genuity analysts Mark Rothschild and Christopher Koutsikaloudis think it’s becoming “increasingly clear that there will be upward pressure on cap rates over the next year.”
In a research note released Wednesday, they expressed concern about the outlook for real estate investment trusts moving forward , seeing a “greater risk” of an economic recession as central banks attempt to harness inflation through “aggressive” rate hikes.
“While we have yet to see significant evidence of an upward move in cap rates, there has been some anecdotal evidence in recent real estate transactions, and we believe that cap rates will settle at a higher level following a period of price discovery,” the analysts said. “We note that last week, Choice Properties REIT adjusted the cap rates used to value its assets and commented that the ultimate move is likely to be between 50-100 basis points. We have, therefore, increased the cap rates we use to value REITs’ portfolios by, on average, 50 bps. As a result, our NAV estimates have declined by, on average, 13 per cent, while our target prices have been reduced by, on average, 10 per cent.”
With those changes, the analysts downgraded a pair of REITS to “hold” from “buy” based on limited return to their targets. They are:
* Firm Capital Property Trust with a $7.25 target, down from $8.25. Average: $8.58.
* Slate Office REIT (SOT.UN-T) with a $4.75 target, down from $5.25. Average: $4.98.
“Our best investment ideas for the next 12 months primarily include REITs in sectors benefitting from strong fundamentals and for which current valuations are attractive relative to peers and private market values,” they said. “Further, we believe Brookfield Asset Management should benefit from rising allocations to alternative investments and growing management fees.
“Our updated best investment ideas for the next 12 months include: Minto Apartment REIT (Target Price: $22.00); Tricon Residential (Target Price: US$15.00); Brookfield Asset Management Inc. (Target Price: US$62.50); First Capital REIT (Target Price: $18.00); Dream Industrial REIT (Target Price: $16.00).”