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Renewed optimism in REITs as interest rates soften, says Colliers

Dividends and diverse assets make sector attractive to some retail investors
9200-glenlyon-parkway-burnaby
REITs offer investors exposure to commercial real estate assets, such as this Burnaby, B.C. office building owned by True North Commercial REIT.

The last three months have seen a recovery in the value of Real Estate Investment Trusts (REITs), with sentiment improving as investors anticipate further interest-rate cuts and seek broad exposure to high-quality commercial real estate.

There is renewed interest in REITs as investors seek income from their portfolios. Deal-making within the sector due to better financing terms could boost returns even more, said Adam Jacobs, head of research with Colliers Canada.

“It’s been an area that‘s been very hard-hit in the last year because of interest-rate hikes, but it really seems to have turned the corner,” said Jacobs. “The last three months have seen a recovery in the value of REITs, with interest-rate cuts coming and investors not feeling so down on real estate. There’s a lot of upside here, and the worst is over.”

The S&P/TSX Capped REIT Index increased about 26 per cent from a low of 142.84 in mid-June to a high of 179.52 in mid-September, according to S&P Global. As of Sept. 25, there was a one-year return of about 15.5 per cent, although three- and five-year returns were negative.

Among the factors driving renewed optimism were recent sales of REIT assets such as shopping centres, warehouses and office towers that attracted high prices, illustrating their underlying value.

“They have some really good-quality assets,” said Jacobs. “There’s been a big downswing, and REITs have been heavily discounted, but then when they go out and sell something to raise cash, they get a premium price, showing that what they own has some value.”

A notable deal last year was the sale by Allied Properties REIT of its Toronto-based Canadian data-centre portfolio to Japanese telecom firm KDDI Corporation for $1.35 billion.

REITs are attractive due to the dividends and commercial-real-estate exposure they offer, Jacobs said: “We’re going back to a world where it’s very hard to get a good return. Bonds and savings accounts are paying low rates, so REITs are going to stand out because they pay out most of their returns.”

Sometimes REITs get a bad rap in the media, but this shouldn’t detract from the value they offer. “If you are in apartments, retirement homes or those kinds of sectors, there is some kind of perception or media risk with negative stories about landlords causing trouble for normal people,” Jacobs said. “I think REITs have gone through a tough patch but there is still a lot of appeal to them.”

Looking ahead, Jacobs said the environment will improve for financing and refinancing, which could lead to mergers within the sector. “Better financing might kick-start deal-making among the REITs,” he said.

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