Despite the recent poor economic news coming from the Canadian economy, analysts believe REITs will recover and remain a safe investment.
Hit with the dual-sided blow of a low dollar and falling oil prices, the Albertan economy has been especially weakened by the economic downturn. However, market experts urge investors to hold tight and weather the storm. “Well-managed REITs with strong property portfolios are likely to bounce back as economic growth picks up, since that’s likely to lead to more demand for space and higher rents,” Toronto-based analyst Mark Rothschild, an analyst who tracks the sector for Canaccord Genuity Corp, told the Edmonton Journal this year.
Rothschild even went as far to say that, “Since many [REITs] are already cheaply priced relative to their underlying net asset values and free cash flow, this isn’t a bad time to go shopping.”
While REITs have been available in the United States since the 1960s, Canadian REITs are comparatively new, having been first introduced to the Canadian marketplace roughly two decades ago. In the 20 plus years since their introduction to the market, the popularity of Canadian REITs has grown and even helped solidify the economy.
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Broken into three categories – Equity, Mortgage and Hybrid REITs – the investment tool allows investors the opportunity to get in on the real estate market without the stress and hassle of managing a property directly. Edmonton home developer and entrepreneur, Rick Willianen, is one of many Canadian investors who has found the diversity of REITs appealing.
“I like the versatility that hybrid REIT holds. I think the diversity of the portfolio will help it to bounce back when the [Canadian] economy regains its footing,” Willianen explains.
The versatility of REITs that Rick Willianen points out is only one of its benefits. Developed on the premise of allowing individual investors access to real estate assets that would otherwise be out of their grasp, REITs offer unique investment opportunities.
“They bridge the gap between, for example, a small-scale investor in New York and a 500,000 square-foot shopping mall in Portland, Oregon,” writes The Street’s Ari Zoldan. “The REIT places everyone on a level playing field regardless of one’s geographical location and financial state.”
Hybrid REITs are primed to do well because they can hold a mix of residential assets that range from homes to apartment buildings. The falling dollar and slumping oil prices are leading analysts to believe that inflation growth may be on the horizon. However, Alberta economist Rhys Chouinard believes, “Most banks expect inflation levels to return to normal levels (between one and three per cent) by 2016,” he said. “It always seems that we bounce back with a lot of resilience.”
To help ease investor fears, Business News Network published an article this year affirming the resiliency of REITs. “The sector has outperformed the TSX by about 200 basis points since the rate hike. So investors have only cheered the results,” Mario Saric, director of real estate and REIT equity research at Scotiabank said. “If there is one message that we try to highlight, it’s don’t be afraid to pay for growth in the REIT space.”
REITs that are more diversified across Canada will feel less of an effect from the current shallow economic downturn. Alberta based REITs may feel more of an impact. Admittedly, the oil and gas sector makes up a large segment of Alberta’s economy. That said, the province has done well to diversify its economy over the past two decades and has been particularly successful in supporting its young entrepreneurs and start-ups. A more diversified company will prove to be a boon for the province’s economy as a whole, as well as Alberta based REITs.