Canadian real estate investment trusts (REITs) have been absolutely crushed over the past two years, thanks in part to the rapid ascent in rates. Indeed, certain pundits may think that the surge in rates is over. After the Bank of Canada’s inaction at its latest meeting, rates may very well be at (or at least close to) the peak.
Of course, rates could always go higher. During the early 1980s, they absolutely skyrocketed to unprecedented levels. As rates peaked, they steadily moved lower over the years. At this juncture, it’s really hard to tell when rates will fall and when the days of rock-bottom rates will return.
Either way, I view the broader basket of REITs as intriguing, especially with their swollen yields. It isn’t just the headwind of higher borrowing costs that could weigh down the REITs further over the next 18 months. A Canadian recession could easily wipe out even more value. However, after the violent plunge in various REITs, a good chance of such an economic contraction may have already been factored in. As is the case with most vicious selloffs, things may overswing to the downside.
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Canadian REITs look so incredibly cheap
Given how hideous things have been in the REIT scene, I’d argue there’s a good chance that many well-run REITs may be overpunished here. However, I believe it’s the most patient of investors who can get the best deals, as REITs may or may not recover quickly from their recent slump, especially if we are in for another few years of high rates.
Indeed, the “higher-for-longer” rate environment isn’t great for the REITs. Regardless, if you can spot the juicy (and safe) yields, I think you’ll be paid for waiting for the tides to eventually turn back in their favour!
Right now, I’m a huge fan of residential REITs, even as the economy sinks lower. Rents have gone up, way up in certain provinces. And though property values and projects may hit a bump in the road, I think the long-term trajectory remains intriguing.
Killam Apartment REIT
Killam Apartment REIT (TSX:KMP.UN) is a great REIT to own for the long haul, thanks to its robust portfolio of income-generating properties on Canada’s Atlantic coast. Indeed, Killam is slightly more growth-oriented than some of its peers. In an era of high rates, growth-focused plays have taken a slight hit to the chin.
At writing, shares of KMP.UN are down more than 31% from their all-time highs. At around 2020 depths, I view shares as a great value. The yield sits at around 4.5%, which I view as attractive, given Killam’s growthy nature. As a long-term play, I’d argue KMP.UN shares are tough to beat if you seek to outperform from a total returns (capital gains and distributions) perspective.
Canadian Apartment Properties REIT
Canadian Apartment Properties REIT (TSX:CAR.UN) may be an even better growth REIT, given its portfolio of properties in the Vancouver and Greater Toronto Area rental markets. The shares are down around 33% from their highs. Like Killam, CAPREIT is hovering around its 2020 depths.
As rates wind down gradually, one has to think that CAPREIT will be in a spot to march higher again. For now, the negative momentum makes shares an ugly ride. The 3.55% yield is intriguing, however, though certainly not the most bountiful of the REITs these days. Indeed, you could grab a yield well north of 6%. But in terms of potential long-term upside, I think it’s tough to pass up CAPREIT, especially at these depths.
