With the Bank of Canada (BoC) keeping interest rates as they are for now, many Canadian investors may wonder just how long it will be before we’re officially in that falling-rate environment. Indeed, many folks out there are continuing to speculate as to when the BoC will finally cut rates. It hasn’t happened yet, but investors may not have to wait much longer.
In any case, I think it’s hard to argue that Canada’s central bank may be closer to cutting rates. Whether the first cut arrives in early summer or closer to autumn, investors should look for investments that can play the longer-term fall in interest rates. Undoubtedly, the month-to-month or quarter-to-quarter timing of the first rate cuts makes little difference in the grander scheme of things.
Inflation and interest rates: Watch out below?
In a number of years from now (two years or more), there’s a good chance that we’ll have nearly 2% (perhaps even a hair lower if artificial intelligence’s impact causes a disinflationary impact) inflation and markedly lower interest rates in Canada. And with that, the high yields in stocks and REITs (real estate investment trusts) may stand to fall accordingly.
Of course, there are no guarantees in the investment world. And an unforeseen event could push central banks to stay on pause for a while longer. In any case, I view plenty of great REITs that already have many risks (interest rate-related and idiosyncratic) priced in.
But do remember, just because the talking heads are going on about when the BoC will act does not mean you need to base your investment decisions on short-term pundit predictions. If anything, it can pay to tune out and do your own homework when it comes to stocks or REITs on your investing watchlist.
As rates fall off and the REITs catch a bit of a break after many years of macro headwinds, I wouldn’t be surprised to see the following REIT picks begin to make up for lost time over the next five years or so. Indeed, many REITs have acted as relative laggards. But as the tides slowly but surely change, I’d start to look to the scene for deals, especially if you’re in the market for a generous passive-income play.
SmartCentres REIT: A top pick before rates reverse
In this piece, we’ll check out one top pick in the Canadian REIT space that currently boasts a towering distribution yield. Enter SmartCentres REIT (TSX:SRU.UN), a retail-focused REIT that’s fallen around 33% from its short-lived 2022 high or around 42% from its 2016 all-time high. With a juicy 8.24% yield, SRU.UN definitely appears to be a mouth-watering addition to any Tax-Free Savings Account (TFSA) passive-income fund.
While there have been major negatives (most notably higher interest rates pushing borrowing costs higher), SmartCentres seems ridiculously oversold and severely undervalued, in my books, even as its distribution becomes a larger commitment. With robust cash flows and a still pretty good occupancy rate (98.5% as of the fourth quarter (Q4) of 2023), I view SmartCentres as more of a REIT that’s primed to pop once the BoC finally gets into cutting mode.
In the meantime, expect SmartCentres to keep diversifying its property portfolio as it pursues its impressive program to push into mixed-use properties. Yes, such a plan entails a lot of spending. But as rates retreat (perhaps in a hurry), SmartCentres’s growth efforts may stand to gain more respect, all while it continues paying its super-sized (and likely safe) distribution!
