The CMHC (Canada Mortgage Housing Corp) expects the Canadian housing market to cool off at an accelerated pace due to the double whammy of inflation and rising interest rates. In fact, CMHC forecasts the average home price in Canada to fall 14.3% by the second quarter (Q2) of 2023 to $660,000 compared to a record high of $770,812 seen in Q1 of 2022.
In July, CMHC expected home prices to fall by just 5% in this period. But as inflation continues to remain elevated, central banks are willing to risk the possibility of a recession by raising interest rates significantly.
There is a good chance for the policy rates to touch 4% by the end of the year compared to 0.25% in Q4 of 2021.
Toronto has already experienced a decline in home prices in recent months, and other cities are expected to follow suit. If recession fears come true, rising unemployment rates could easily result in higher delinquency rates and accelerate the Canadian housing market crash.
So, how do you invest in Canadian real estate, given a steep correction is imminent? Well, investors can consider buying shares of real estate investment trusts (REITs) such as Summit Industrial REIT (TSX: SMU.UN).
Is Summit Industrial REIT a buy?
A REIT focused on growing and managing a portfolio of light industrial properties in Canada, Summit Industrial Income REIT is valued at a market cap of $3.40 billion. The stock is down 25% from all-time highs, increasing its dividend yield to 3.2%. However, the REIT has returned 272% to investors in dividend-adjusted gains in the last 10 years, easily outpacing the TSX in this period.
Light industrial properties are single-story properties located near key transportation hubs. These properties are generally used for warehousing, storage shipping, and light assembly activities.
The strength and stability of the sector have allowed Summit to expand its portfolio of light industrial properties at a healthy pace over the years.
Summit Industrial aims to increase its funds from operations and earnings via effective property management, acquisitions, and development opportunities. It provides tenants with efficient and high-quality industrial properties close to major transportation links and population centres.
The REIT has increased sales from $92.15 million in 2018 to $216.9 million in 2021. Its operating income has almost tripled from $59 million to $150 million in this period.
Summit Industrial REIT explained, “Historically, light industrial properties have generated, on average, income returns at or near the top of the Canadian real estate industry.”
What’s next for Summit REIT and investors?
Real estate or income-seeking investors can consider buying solid REIT companies such as Summit due to its low capital expenditures, sustainable maintenance costs, leasehold improvement, and tenant inducements.
In fact, due to its steady and predictable cash flows, Summit Industrial pays investors a monthly dividend of $0.048 per share. These payouts have increased by 2% annually in the last 10 years.
Due to a combination of lower market rent volatility, lower operating costs, and a diverse tenant base, Summit Industrial REIT remains a top bet for real estate investors. Investing in this company will diversify your portfolio and allow shareholders to create a passive-income stream via dividend payouts.
