Scotiabank REIT analyst Mario Saric noted that a stagflationary environment would not be good for his sector,
“We tackle the most popular discussion topic from our last round of marketing, namely how to think about Canadian REIT allocations if stagflation/recession becomes a reality (it is worth noting neither is forecast by Scotia Economics through 2023) … Need to revisit the 1970s/early 1980s to discuss stagflation . REIT total return lagged the broader benchmark by a modest average ~200bp [basis points] during the 3 periods we identified. We think stagflation = NAVPU [ net asset value per unit] erosion = poor CAD REIT total return. Lower forecast NOI [net operating income] may = higher private market cap rates given the 10YR GOC yield is +209bp since 2020 (vs. 14bp private market cap rate decline). That’s not a good combo for our NAVs and total returns given high reliance of REIT unit prices on NAVPU growth over the past 15+ years… REITs and recessions don’t get along; before and after is fine. On average, REITs perform in line with broader benchmark heading into the 6 identified recessions since 1970 (they did lag into the GFC and COVID recessions), but then under-perform during the recession (including the last two). Notable out-performance (+5%) typically starts 6 months post recession completion and grows over the following 12 months to +24%. Go more defensive if you believe a recession is coming in 2022 … "
Mr. Saric’s top picks for growth oriented REITs are Brookfield Asset Management Inc., Granite REIT, Interrent REIT, Flagship Communities REIT, Summitt Industrial Income REIT, Storagevault Canada Inc., and Tricon Capital Group. For value investors his selections are Canadian Apartment Properties REIT, Brookfield AM, Chartwell Retirement Residences, Dream Industrial REIT, European Residential REIT, Interrent and Riocan REIT. For straight Income, he likes Automotive Properties REIT, Crombie REIT, CT REIT, and Northwest Healthcare Properties.