The Bank of Canada raised its policy rate nine times from March 2022 to July 2023, for a cumulative increase of 4.75% from 0.5% in February 2022. Since July 2023 to the present, the central bank has kept the rate at 5%. Some sectors benefit from rising interest rates, but it hurts real estate the most.
Canada’s housing market was red hot before rate hikes. Fortunately, it cooled but did not crash when the Feds’ tightened their monetary policy. Still, prospective homebuyers and sellers stayed on the sidelines for apparent reasons – higher borrowing costs and declining prices. Real estate investors avoided the unstable market.
However, the market dynamics could change for the better soon, especially for real estate investment trusts (REITs). Industry analysts believe a bounce back is possible in 2024 when rate cuts begin. For dividend investors, residential and industrial REITs are the top plays in a low-rate environment.
Killam Apartment (TSX:KMP.UN) and Nexus Industrial (TSX:NXR.UN) have been steady amid massive headwinds and should do better as interest rates recede. More importantly, expect consistent and generous monthly passive income streams.
Rental over purchase
Killam Apartment is one of Canada’s established institutional landlords in the residential sub-sector. This $2.25 billion growth-oriented REIT owns and operates apartments (18,835 units) and manufactured home communities, or MHCs (5,975 sites), in Atlantic Canada, Ontario, Alberta and British Columbia.
Demand for rentals rose because of more expensive mortgages and reduced affordability. The Bank of Canada also said the high interest rate would or must stay longer. Meanwhile, Killam continues to develop and expand its portfolio to keep up with demand. The REIT is also divesting from slower markets.
Around 57% of Killam’s net operating income (NOI) is under provincial rent control. Nonetheless, in 2023, property revenue and NOI increased 5.9% and 8.3% year over year respectively to $348.1 million and $224 million. Because of fair value gains on investment properties, net income rose 117% to $266.3 million from a year ago. At year-end 2023, same-property apartment occupancy was 98.5%.
Killam expects further rental rate growth in 2024. Its president and CEO, Philip Fraser, adds the development pipeline should contribute to future earnings growth and alleviate the housing supply shortage. If you invest today, the real estate stock trades at $19 per share (+6.44% year to date) and pays a 3.64% dividend.
Favoured asset class
Nexus Industrial owns office and retail properties, but its portfolio is predominantly industrial (73.5%). The $726.9 million REIT changed its corporate name to Nexus Industrial REIT in January 2022 to reflect its goal of becoming a pure-play industrial REIT. At $7.75 per share, current investors partake in the 8.08% dividend.
Management will present the Q4 and full-year 2023 results this week, although the figures after three quarters were impressive. In the nine months ending September 30, 2023, property revenues, NOI, and net income rose 15%, 17%, and 15% year over year to $115.6 million, $82.7 million, and $157.9 million, respectively.
According to Nexus CEO Kelly Hanczyk, the industrial sector is a favoured asset class. It remains stable, notwithstanding market uncertainty and a heightened interest rate environment.
Invest for passive income
REITs are the next best alternatives to owning investment properties. And if you’re investing for passive income, your money is safe with Killam Apartments or Nexus Industrial.
