2 REITs to Watch as Rates Retreat Next Year

Canadian Apartment Properties REIT (TSX:CAR.UN) and another property play that could have a lot to gain if rates fall from here.

Interest rates have been surging in recent quarters, applying steady pressure to the rate-sensitive REITs (real estate investment trusts). Indeed, the REITs space looks oversold, with swollen yields, and valuations that look quite intriguing for income seekers with a long-term investment horizon.

Of course, timing the Bank of Canada’s next move will always prove difficult. Given how much inflation has retreated in recent quarters, however, it certainly seems like the central bank may have what it needs to hold off or even cut interest rates in 2024.

Billionaire activist investor Bill Ackman, a man who’s known to make bold calls, thinks the U.S. Federal Reserve will cut rates as soon as the first quarter of next year. Undoubtedly, Ackman has positioned his bets accordingly. If the Fed begins to cut, the Bank of Canada may also have the means to. Either way, the REITs could certainly prosper as rates look to retreat.

If the path of rates is, indeed, lower from here, the following REITs could be in for a nice turnaround.

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Canadian Apartment Properties REIT

Canadian Apartment Properties REIT (TSX: CAR.UN) is a “growthy” residential REIT that sports a swollen, albeit modest yield of 3.2% at writing. Undoubtedly, shares recently soared more than 10% off recent lows but remain down over 27% from its all-time high peak hit in 2021. If rates reverse course starting next year, I’d look for CAPREIT shares to make a move towards new highs. Undoubtedly, rates have been a pain point for many REITs, especially residential REITs with promising growth profiles.

As one of the highest quality REITs in Canada, I’d not be afraid to pick up a few shares by year’s end in case there’s a chance that central banks take on a far more dovish stance, potentially catching REIT investors off guard.

Sure, you won’t lock in the largest yield with CAR.UN. But I think shares could be among the quickest to recover from its multi-year slump. That alone makes me favour CAPREIT over almost any other REIT.

H&R REIT

H&R REIT (TSX: HR.UN) is a diversified REIT that’s been battered harshly in recent years. The dividend yield is getting swollen again at 6.71%. After the sale of non-core assets, H&R has a nicely streamlined property portfolio and the means to bolster its residential mix through development projects. In short, H&R’s mix is becoming more attractive over time. The REIT is making progress with its five-year strategic plan. And as it continues to navigate the storm, I think shares will live to see better days again.

At these depths, H&R may seem like a riskier REIT. However, I believe the reverse to be true of the deep-value play, with shares going for a mere $9 per share. Arguably, battered REITs like H&R could have the most room to run once rates head lower. In the meantime, management is doing a decent job of streamlining things.

Bottom line

Ackman is calling for lower rates in the new year, and I think there’s a good chance he’ll be proven right. REITs have been relative laggards in recent years but could have what it takes to turn a corner, as rates come in. CAR.UN and HR.UN are two of my favourite plays to pick up for 2024.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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