Is 2023 a Good Year to Invest in Real Estate Stocks?

A residential REIT should benefit from the strong rental demand, although necessity-based and industrial real estate stocks are good investment prospects too in 2023.

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Are real estate stocks good investments in 2023? The answer is probably if the basis is the sector’s year-to-date performance (+10.52%). Real estate investment trusts (REITs) took a beating last year due to rising interest rates. However, if you want exposure to the real estate market, evaluate the prospects carefully.

Morguard North American Residential (TSX:MRG.UN) should benefit, as more Canadians become renters due to higher mortgage costs. Slate Grocery (TSX:SGR.UN), an owner and operator of grocery-anchored real estate, will remain stable. Dream Industrial (TSX:DIR.UN) should thrive with the ever-increasing demand for multi-use industrial properties.

Higher demand and regional diversity

Morguard NA owns a diversified portfolio of residential apartment communities in Canada (16) and the United States (26). The $1.04 billion REIT enjoys high occupancy rates in the home country (99%) and across the border (95%). At $18.55 per share, the stock beats the market year to date (+14.88% versus +4.17%) and pays a decent 3.78% dividend.

Its chairman and chief executive officer (CEO) K. Rai Sahi said multi-suite residential properties are excellent asset classes and maintaining a portfolio with regional diversity favours or give Morguard an advantage. Management’s internal strategy focuses on maximizing cash flows from the portfolio. Externally, the REIT will acquire more properties in urban centres and major suburban regions.

Resilient and defensive

Slate Grocery attracts investors for the resiliency and defensive nature of the real estate portfolio and the clear runway for continued revenue growth. In 2022 (12 months that ended December 31, 2022), rental revenue and net income increased 15% and 58.8% year over year to US$177.48 million and US$138.87 million.

Its CEO Blair Welch said, “Our year-end results show that Slate Grocery REIT has maintained stable growth and performance throughout 2022, despite broader market volatility and uncertainty.” He added that grocery-anchored fundamentals are tailwinds and expects leasing demand to remain strong in 2023.

Welch revealed that the REIT evaluates a deep pipeline of new leasing opportunities. There is high demand for essential and service-based users, and many strong credit national tenants are looking for quality spaces. 

Management will pursue new investment opportunities and acquire well-located real estate anchored by high-performing grocers, notwithstanding the broader market volatility.

Don’t expect much price appreciation, although the dividend payments should be stable (41.24% payout ratio). At $14.77 per share, the $882.63 million REIT pays a mouth-watering 5.91% dividend.

Robust leasing momentum

Dream Industrial boasts a stable and diverse asset mix, from distribution and urban logistics to light industrial properties. This $4 billion REIT capitalizes on the growing-commerce demand. The high-quality portfolio (257 properties) in Canada, the U.S., and Europe delivers strong total returns because cash flows are secure. Furthermore, availability in the sub-sector remains at record lows.

In 2022, net income rose 16% to $705.88 million compared to 2021. Management credits the attractive rental spreads and solid contractual rent growth for last year’s robust leasing momentum. Through a joint venture with GIC, Dream acquired Summit Industrial recently.

DIR.UN has outperformed thus far in 2023 with its 27.06% year-to-date gain. At $14.79 per share, the dividend yield is 4.68%.

Better alternatives

Real estate experts predict housing activity to bottom by the first half of 2023. REITs in the residential, necessity-based, and industrial sub-sectors are better alternatives to buying physical properties.  

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Dream Industrial Real Estate Investment Trust and Morguard North American Residential Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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