The Canadian rental story just changed direction. Average asking rent for a two-bedroom apartment across Canada’s major metropolitan areas fell 3.6% year over year in the second quarter.
That doesn’t mean the housing shortage has disappeared or apartment buildings have suddenly become terrible investments. It does mean investors shouldn’t assume every landlord can keep raising rents at yesterday’s pace. I’d therefore look at a different kind of rent cheque.
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Not all rent is residential
Apartment landlords depend on household formation, immigration, local supply, regulation, and what renters can afford. Industrial landlords have a different customer. Warehouses, distribution centres, manufacturers, and logistics operators need buildings positioned near highways, ports, cities, and supply chains.
That demand can slow too, but it doesn’t move in lockstep with apartment asking rents. Granite Real Estate Investment Trust (TSX: GRT.UN) gives investors exposure to that side of the property market.
Granite owns 145 logistics, warehouse, and industrial properties across North America and Europe, representing roughly 61.5 million square feet. Its portfolio occupancy currently sits around 98%. A tenant may negotiate hard over the rent. Moving an enormous distribution operation is considerably harder than changing apartments after the lease expires.
Collect it monthly
Granite also provides something income investors tend to appreciate, and that’s a monthly distribution. The REIT currently pays $0.30 per unit every month, or $3.55 annually. At writing, that’s a yield of roughly 4.2%. The payment increased from $0.28 monthly late last year.
Frequency isn’t the same as safety, of course. Investors looking at Canadian dividend stocks should treat a REIT distribution the same way they’d treat a corporate dividend. That is, check whether the underlying properties are producing enough cash, then look at debt.
Granite’s high occupancy gives it a good starting point. Its geographic diversification also helps. A Canadian apartment landlord can become heavily exposed to one province’s rent rules or housing cycle. Granite spreads properties across six countries.
Why now?
Interest rates have made things harder. Higher bond yields compete with REIT distributions and can push investors to demand lower prices. They also raise refinancing costs for landlords. That pressure is unpleasant for existing owners, but it can create better entry points for buyers with longer horizons.
Granite has also kept its balance sheet flexible enough to continue looking for opportunities. Earlier this year, it renewed a normal-course issuer bid allowing it to potentially repurchase up to roughly 10% of its public float if management considers the price attractive.
That doesn’t guarantee buybacks. However, it does give management another place to allocate capital when buildings aren’t the best thing available for purchase.
Considerations
Industrial real estate isn’t immune to an economic slowdown. A recession can reduce shipping volumes, manufacturing activity, and demand for warehouse space. Magna International also remains an important Granite tenant, creating concentration risk.
Property values can fall when capitalization rates rise, while refinancing debt at higher rates can eat into cash flow. That’s why I’d buy gradually when buying stocks in Canada, not treat 98% occupancy as an invisibility cloak.
Bottom line
Canadian apartment asking rents can fall while another corner of real estate remains useful. Granite owns the warehouses and distribution facilities companies need to keep products moving. Occupancy remains high, the portfolio is geographically diversified, and investors collect a roughly 4.2% yield monthly.
I wouldn’t abandon residential real estate because rents cooled. I’d simply make sure my entire property investment isn’t waiting for the same rent increase.
