Rising Interest Rates: Opportunity or Threat for Canadian Real Estate Investors?

Where real estate prices will go depends on the supply-demand dynamic in the industry as well as where interest rates will go.

The Bank of Canada maintained a low policy interest rate between 0% and 2% from about 2010 to 2022. So, it’s only natural that Canadian real estate investors were caught off guard when the bank rapidly increased interest rates, hitting the recent high of 5% to counter the relatively high inflation.

Immediately, this squeezed the wallets of real estate property owners whose mortgages were under variable interest rates. Those who were under fixed interest rates were temporarily exempt from the higher rates until they had to renew their mortgages that are typically under a five-year term. To the horror of some real estate investors, they found their mortgage payments more than double in this turn of events. Unfortunately, it means that some real estate investors had to give up and sell their properties because their income wasn’t able to cover the monthly mortgage payments and their other costs of living.

For real estate investors looking to buy, higher interest rates might lead to less competition and a potential drop in real estate prices. However, it really depends on the markets you’re looking at. Hot cities of living will see more resilient property prices. It also depends on where interest rates will be going. Since July 12, the Bank of Canada has maintained the same policy interest rate as it continues to observe the situation. Based on the changes in inflation, the policy rate could be raised further if needed.

If investing in Canadian real estate directly is too big of an investment for you at the moment, you can consider investing passively in real estate through Canadian real estate investment trusts (REIT). Importantly, you can make as small or as big an investment as it makes sense for your financial situation and investment goals. Higher interest rates have generally driven Canadian REIT valuations lower, providing an interesting investment opportunity that could generate decent monthly income and the potential for nice price appreciation.

Dream Industrial REIT

Dream Industrial REIT (TSX: DIR.UN) is in the relatively defensive industrial real estate industry. It has actually held up quite well in a rising interest rate environment, with the stock actually up about 9% over the last 12 months. It is roughly 23% lower from its 2021 peak, though. If it returns to that level in the future, investors will witness upside of north of 33%. Meanwhile, it pays out a decent yield of close to 5.4%, which is paid out as monthly cash distributions.

The industrial REIT’s industrial real estate investments are primarily in Canada (61% of the portfolio value) and Europe (30%). Last month, it reported strong mark-to-market rent spreads of 30%. It was 47.7% in Canada, indicating a tight supply and strong demand scenario. In comparison, the mark-to-market potential of 7.9% in Europe was much milder.

Here’s a better gauge of the Canadian REIT’s price appreciation potential. At $13.02 per unit, the 12-month analyst consensus price target represents a discount of about 19% or near-term upside potential of 23%.

Canadian REITs are already diversified as they have a portfolio of properties that generate rental income. For further diversification, you can consider these top Canadian REIT ETFs.

Fool contributor Kay Ng has no position in any of the stocks mentioned. The Motley Fool recommends Dream Industrial Real Estate Investment Trust. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

How Big Does Your TFSA Need to Be to Pay $1,000 a Month?

A TFSA yielding 6% would need roughly $200,000 to produce $1,000 in average monthly income.

Read more »

Data center servers IT workers
Dividend Stocks

Data Centres Need Power, but Higher Rates Change the Math: I’d Watch This TSX Stock

The computers may be futuristic. Getting paid for supplying their electricity is pleasantly old-fashioned.

Read more »

man looks surprised at investment growth
Dividend Stocks

Withdrawing From Your TFSA? This Timing Mistake Could Cost 1% a Month

A TFSA withdrawal is tax-free, but replacing it too soon can accidentally create an expensive overcontribution.

Read more »

man in suit looks at a computer with an anxious expression
Dividend Stocks

I’m Putting My Next $2,000 Into This 4.5% Dividend Stock

Brookfield Asset Management (TSX:BAM) has a 4.5% dividend yield.

Read more »

dreaming of financial success
Dividend Stocks

How Dividends, CPP and OAS Can Fit Together in Retirement

CPP and OAS rarely pay for a full retirement. Here's how quality TSX dividend stocks such as BAM can fill…

Read more »

Canadian investor contemplating U.S. stocks with multiple doors to choose from.
Dividend Stocks

Enbridge vs. Telus: The Dividend Stock I’d Put $10,000 Into Today

Both Enbridge and Telus stocks have been favourites among income investors for their dividend yield and growth.

Read more »

money goes up and down in balance
Dividend Stocks

Foreign Money Is Pouring Into Canadian Banks: Is This One Still Worth Buying?

I’d still consider BNS for a long-term portfolio, although I’d build the position gradually rather than chase a rally that…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Make $250 a Month Tax-Free: The 4-Stock TFSA Plan I’d Follow

If you are looking to generate $250/month of tax-free passive income, this TFSA portfolio will provide a long-term, growing income…

Read more »