Real estate investment trusts (REITs) are poised for a strong year due to lower mortgage rates, and even low oil prices could prove a boon to the traditionally conservative sector, analysts say.
Canadian REITs are listed on the Toronto Stock Exchange (TSX) and with a return of 9.5% have out performed the broader S&P/TSX stock index in the past 12 months. The day after the January 21 cut in the Bank of Canada (BoC) overnight lending rate to 0.75% from 1%, volume in REIT trading rose nearly 30%. Since then, the S&P/TSX REIT index has hit its highest level in two years.
“The conditions for success that propelled REIT prices higher last year are shaping up similarly for this year,” said Corrado Russo, managing director, investments and global head of securities, at Toronto-based Timbercreek Asset Management. Russo added that there is a “wall of money looking to invest in real estate.”
Interest rates represent one of the highest costs for REITs, and it is expected that many will refinance their long-term debt if commercial mortgage rates continue to come down.
Robert Palmer, CFO of Calgary-based Northern Properties Real Estate Investment Trust (NPR), said NPR is holding up to 400 mortgages at any time, typically with 10-year terms. NPR’s portfolio includes multi-family properties in Abbotsford, on Vancouver Island and in Fort St. John.
Palmer said commercial lending rates have come down since the new BoC rate was set; 10-year term mortgages on its multi-family rental buildings, for example, are now in the 2.4% range.
With 25% of NPR’s properties in Alberta, including the oilands centre of Fort McMurray, he said the direction of oil prices is also a concern.
“Would we be happier with $100 oil than with $50 oil? Absolutely,” Palmer said, “but no one really knows where the oil price is headed.
“We have our plans in place and we are maintaining a conservative balance sheet.”
Cheaper oil could help the bottom line of some REITs, according to Russo: “Lower oil prices may lead to lower operating expenses [for commercial property], resulting in higher net operating income and earnings growth.” •
