The Canadian REIT (Real Estate Investment Trust) scene has been rather quiet in recent months. Undoubtedly, the risk-on trade seems to be alive and well amid the glorious tech-focused rebound in the stock market. That said, let’s not forget about the REIT plays, many of which are not only quite cheap right now but also yield a great deal more than that of historical norms. Indeed, chasing yield is a bad idea for passive income investors.
The higher the yield, the higher the risks of a distribution cut can become. The good news is that relief could be on the way, with Bank of Canada rate cuts that could kick in as soon as this year.
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REIT yields could fall in the coming years alongside rates
Of course, we’ve heard quite a bit of talk regarding the U.S. Federal Reserve and its plans to cut back on rates. Some of the less-dovish folks out there may think the Federal Reserve will stand pat through the year, perhaps going against the expectation of three rate cuts for 2024. As for the Bank of Canada, some pundits think they’ll act sooner and perhaps more aggressively.
Though only time will tell which of the two central banks will be first to act with rate cuts, long-term investors should look for rates to come off recent highs over the medium term. Indeed, numerous factors, ranging from what remains of inflation to various geopolitical issues, could impact the timing of rate cuts. But such timing is less important for long-term thinkers.
In any case, I believe that the most stellar REITs could prove undervalued in as little as two to three years. My guess is that rates will be considerably lower three years from now as central banks look to backtrack on the inflation-fighting rate hikes delivered over the past few years.
As rates go lower, don’t expect REIT yields to stay at today’s frothy heights. Indeed, a swollen REIT yield will look that much more generous when rates are lower and jumbo rates on risk-free assets become a relic of the recent past.
CAPREIT: A top long-term REIT play for investors
Consider Canadian Apartment Properties REIT (TSX: CAR.UN), which is going for $44 and change per share after its latest tumble off its year-to-date highs. Undoubtedly, the residential REIT remains best-in-breed, in my opinion. However, various pressures have made it a turbulent time for investors. With a nice 3.22% yield and a good shot at long-term capital gains, however, I do view shares as worth pursuing on the latest round of weakness.
This year, CAPREIT has been buying and selling various real estate assets quite strategically. With the first-quarter disposition of three older residential properties (two of the three in the Greater Vancouver area) and the acquisition of two impressive-looking properties in London, Ontario, I view CAPREIT as a firm that’s not afraid to make bold strategic moves to bolster value for shareholders, even in these tough times.
All considered, I view CAPREIT as a high-quality, growthy REIT that’s one of the best REIT buys on weakness if you intend to hold for at least three years. As always, the longer your investing horizon, the better.
