The Surprising REIT That Is a Great Bet Right Now

Worried about mass unemployment and people not being able to make their rent? So are most people. Here’s my take on why residential REITs like Killam Apartment REIT (TSX:KMP.UN) and Canadian Apartment REIT (TSX:CAR.UN) are actually great bets right now.

edit Real Estate Investment Trust REIT on double exsposure business background.

Image source: Getty Images

The broad market sell-off has not had the typical inverse impact on Canadian real estate investment trusts (REITs) that many investors had expected. This is particularly true for residential-focused REITs. REITs and other bond-like proxies typically do well in a falling interest rate environment. Canada has followed the U.S. in lowering benchmark central bank-dictated rates to zero.

This, of course, is an abnormal time. The market is pricing some concern into residential REITs such as Killam Apartment REIT and Canadian Apartment REIT. This concern centres on the idea that mass unemployment could ultimately lead to the inability of folks to pay their rent. This could lead to potential long-lasting cash flow issues. In addition, vacancy rate would be negatively impacted. Further, net operating income and cap rates in the sector would decrease significantly.

Office/retail REITs

My view on residential REITs is that these trusts are far safer than retail or office REITs. This is true, even given the economic shockwaves that are hitting markets like a tsunami. There are a few key reasons for this. Investors in the real estate space should be less worried about residential real estate. Retail or office real estate is far riskier. There is an important reason for this. The key difference between residential and office/retail REITs is the propensity of tenants to pay.

Put simply, those who are paying rent for office space or storefront/retail space for their businesses have a far greater likelihood of delinquency. Businesses go bankrupt all the time. To a large degree, this reality is somewhat baked into office/retail REITs. These contracts typically have higher provisions for losses and vacancy exceptions.

Why residential REITs are the safest bet

Renters who miss payments to their landlords would be concerned about getting kicked out of their homes and onto the street. This would be the worst possible scenario for them. Most folks will take out loans, run up credit card debt, and miss payments on student loans or car loans before missing rent payments for this reason.

The last thing most people will default on is their housing. Vacancy rates in most highly populated areas in Canada are very low. Therefore, it is unlikely that apartment REITs like Killam or CAR will see a significant, prolonged uptick in vacancy rates, particularly in those markets. Furthermore, the cost of refinancing mortgages has just dropped substantially. This makes it an excellent time for residential REITs to work on their books and make adjustments where possible.

Bottom line

There are a multitude of sectors that can expect to feel a significant amount of pain. However, apartment REITs are not likely to get hit as hard as the market is pricing in right now, in my view. The federal and/or provincial governments are likely to step in to prevent renters from being thrown of their homes before any such scenario plays out.

Stay Foolish, my friends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any of the stocks mentioned.

More on Investing

Dice engraved with the words buy and sell
Stocks for Beginners

The TSX’s Biggest Losers in January 2023 (Should You Sell?)

While markets have trended up in 2023, the recent natural gas drop has made some energy stocks the TSX's biggest…

Read more »

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Monday, February 6

TSX investors may remain focused on corporate earnings and new geopolitical developments today.

Read more »

Doctor talking to a patient in the corridor of a hospital.
Investing

TFSA: Healthcare Dividend Stocks Are Perfect for Passive Income

Top healthcare dividend stocks like Extendicare Inc. (TSX:EXE) and others can provide huge passive income in your TFSA.

Read more »

TFSA and coins
Tech Stocks

TFSA: Invest in These 2 Stocks for a Legit Chance at $1 Million

Are you interested in building a $1 million portfolio? Invest $20,000 in these two stocks!

Read more »

edit Person using calculator next to charts and graphs
Investing

The Top TSX Stock on My Watch List Right Now

Here's why Alimentation Couche-Tard (TSX:ATD) remains a top TSX stock that long-term investors seeking growth and yield will want to…

Read more »

Hourglass projecting a dollar sign as shadow
Investing

3 Stocks to Add to Your TFSA ASAP

Given their stable cash flows and solid underlying businesses, these three stocks are excellent additions to your TFSA in this…

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

Better Buy: Fortis Stock vs Enbridge

Fortis stock and Enbridge are top dividend stocks on the TSX today. Which stock is better buy for safe dividend…

Read more »

Canadian Dollars
Dividend Stocks

How to Make $1,500 in Passive Income 4 Times a Year

Blue-chip TSX stocks such as Enbridge can enable investors to create game-changing wealth over the long term.

Read more »