The past two years of prolonged, heightened interest rates have caused some parts of the market to struggle more than others. Canadian real estate investment trusts (REITs) were hit especially hard, thanks in part to their capital-intensive business models.
This led to investor rotation into other income products perceived as safer.
Fortunately, with interest rates starting to level off and fundamentals holding better than expected, the tide may finally be shifting in favour of Canadian REITs.
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Why Canadian REITs struggled
That downturn was directly attributed to the hike in interest rates. More specifically, it was because the Bank of Canada hiked rates at the fastest pace in decades.
Interest rates remain the defining force behind REIT performance, making them a critical factor for real estate investing in Canada.
While this was intended to cool inflation, it also led to borrowing costs surging and cap rates expanding. That combination drove property valuations down and pressured net asset values (NAVs).
Concurrently, Guaranteed Investment Certificates and bonds, offering considerably lower risk, suddenly started offering yields near 5%. Even with stable occupancy and resilient cash flow, REITs were still treated as a second‑best option by many investors.
Fortunately, that environment is shifting. Rate cuts are either underway or increasingly expected, which allows refinancing to unlock lower ongoing costs and support improving valuations.
This is happening alongside persistent, strong occupancy numbers in key metro markets that offer strong rent growth. The result is significantly stronger balance sheets for some Canadian REITs.
In short, these catalysts are helping investors revisit a sector that has been deeply discounted.
Two REITs in particular stand to benefit from that shift, especially in the early stages of a recovery. Here’s how that could impact your portfolio.
Canadian Apartment REIT
Multifamily is often the first REIT segment to see a recovery, and Canadian Apartment REIT (TSX: CAR.UN) is positioned at the centre of that shift.
Demand for rental housing in Toronto and Vancouver remains exceptionally strong. This continues to drive up rent growth at near‑full occupancy. Canadian Apartment’s portfolio benefits from supply constraints, population growth, and a structural housing shortage.
The REIT’s balance sheet is solid, with a manageable debt maturity profile and a stable payout ratio supporting its monthly distribution. As of the time of writing, Canadian Apartment REIT offers a yield of 4.09%.
Prospective investors should also note that while the overwhelming majority of Canadian Apartment REIT’s near 45,000 properties in major metro markets in Canada, the REIT does also offer properties in Europe.
This adds a rare bit of diversification to an already impressive property portfolio. It also solidifies the REIT is one of the most compelling Canadian REITs to own right now.
Granite REIT
Investors often associate REITs to residential properties. While it is true that residential REITs are the most common type of property, other REIT types do exist and offer compelling investment opportunities.
One such opportunity comes in the form of industrial real estate properties. Industrial real estate has been the strongest commercial property segment globally in recent years, riding a wave of momentum.
Industrial properties often boast long-term leases, high-quality tenants and are often part of global chains that provide an element of stability and diversification.
For investors looking at the market of Canadian REITs to consider, Granite REIT (TSX: GRT.UN) offers exposure to the industrial market.
Low leverage and strong liquidity give the REIT flexibility, while its development pipeline supports future adjusted funds from operations growth.
In a recovering REIT market, GRT.UN offers a blend of defensive characteristics and steady expansion potential. And like Canadian Apartment REIT, Granite’s 147 investment properties include properties both in North America and Europe.
Turning to distributions, Granite’s monthly payout offers a yield of 3.9%, making it a super addition to any portfolio containing Canadian REITs.
Final thoughts for investors
Canadian REITs are exiting a difficult two‑year stretch. As a result, both Canadian Apartment REIT and Granite offer investors a robust monthly distribution and a path to long-term growth.
In my opinion, one or both would be well suited to any well‑diversified portfolio focused on real estate investing in Canada.
