REIT sector offers safe haven for investors after spectacular rebound
Investors looking for dependable income in a low return world may want to consider real estate investment trusts.
The REIT sector spans everything from apartment buildings to warehouses and has enjoyed a spectacular rebound this year. More good news may be on the way, says Lee Goldman, senior portfolio manager at CI Global Asset Management.
“We’re very positive,” says Mr. Goldman, who co-manages several real estate funds. The one best known to retail investors is the CI Canadian REIT ETF (RIT-T), which has delivered an 11.5-per=cent annualized average return over the past five years and has beaten its benchmark by more than a percentage point per year on average.
The fund has surged 26 per cent over the past year, more than compensating for a miserable 2020, when a locked-down economy dragged the REIT sector as a whole to a 13-per-cent loss. Mr. Goldman isn’t expecting a repeat of either this past year’s giant gains or the prior year’s stinging losses, but he is optimistic about what the next year holds.
For one thing, operational results have been strong at most REITs. For another, some of the hardest-hit REITs appear to be emerging from their pandemic woes. Finally, there is the allure of holding real assets during a time when inflation is ripping.
Investors should know exactly what they are buying, though. Returns have varied widely across five major subsectors – industrial space, apartments, retail, offices and seniors housing. For the most part, industrial and apartment REITs have thrived over the past year, with returns of 30 per cent or more. In contrast, specialists in offices and seniors housing have languished. Retail REITs have fallen somewhere in between.
Mr. Goldman says his fund “stuck with what was working” over the past year but is taking a more diversified approach for the year ahead.
For starters, that means continuing to ride winners such as Granite (GRT.UN-T), Dream Industrial (DIR.UN-T) and Summit Industrial Income (SMU.UN-T), the three big Canadian industrial landlords. All benefited as online retailing surged during the pandemic and fed demand for warehouses and logistics facilities. That trend shows no sign of fading.
“We’re seeing incredibly low vacancy rates” in industrial space across Canada, Mr. Goldman says. Countrywide, the figure is less than 2 per cent.
Apartment REITs, such as Canadian Apartment Properties (CAR.UN-T) and Killam Apartment (KMP.UN-T), are also enjoying good times. As people who fled the pandemic return to cities and as immigration surges back to normal levels, further gains are likely.
The challenge for investors is that both industrial and apartment REITs have climbed so much this year that their share prices tend to reflect their solid fundamentals. Retail REITs, such as RioCan (REI.UN-T) and First Capital (FCR.UN-T), have also bounced back after cutting their distributions in the early days of the pandemic.
Bargain hunters may therefore want to consider subsectors that are still nursing their bruises. Office REITs, such as Allied Properties (AP.UN-T) and Dream Office (D.UN-T), continue to struggle with the mystery of whether employees will ever return en masse to cubicle-land. Operators of seniors housing, such as Chartwell Retirement Residences REIT (CSU.UN-T) or Sienna Senior Living Inc. (SIA-T), are still feeling the imprint of the pandemic on their occupancy rates.
In both areas, Mr. Goldman sees reasons for optimism.
In the case of office REITs, employees have been trickling back to their workstations despite the continuing uncertainty around the impact of the Omicron variant of COVID-19. Early predictions that offices would vanish haven’t come to pass. “We think 2022 should show a good improvement over 2021 in office operating results,” Mr. Goldman says.
In the case of seniors housing, an aging population is expected to create a multidecade surge in demand. Mr. Goldman says the current problem isn’t that seniors have fled these residences, but that the pandemic has deterred new residents from moving in. Assuming the virus relaxes its grip, occupancy rates may start to rebound in the months ahead. “We think we are at an inflection point,” he says.
The most obvious risk to the rosy outlook for REITs would be a big rise in interest rates. Soaring rates would increase borrowing costs for REITs and also make their payouts – typically in the range of 2.5 per cent to 4.5 per cent a year – look less attractive.
But so long as interest rates are rising because the economy is thriving, Mr. Goldman thinks REITs should weather a round of modest rate increases. “The real danger is if rates go up suddenly and surprisingly,” he says. But people are braced for a modest uptick in rates and those expectations are already embedded in share prices.
Mr. Goldman’s top picks for the year ahead include European Residential REIT (ERE.UN-T), a TSX-listed owner of apartment buildings in the Netherlands, which stands to benefit from the continent’s ultra-low borrowing costs and a relative lack of other big players in its market niche. He also likes Allied Properties, an office landlord that has demonstrated resiliency through the pandemic and would benefit from any wider return to the office.
Finally, optimists may like American Hotel Income Properties (HOT.UN-T), a TSX-listed operator of U.S. hotels that would gain from a continued rebound in travel. “It has the most torque to an economic recovery,” Mr. Goldman says.