More interest rate cuts prime REITs in Canada for a rebound, TD says
Canadian real estate investment trusts are primed for a rebound as investors grow more confident in near-term interest rate cuts across North America, according to TD Cowen.
With the United States Federal Reserve ready to pivot and the Bank of Canada widely expected to lower its benchmark rate for the third time when it convenes next week, yield-chasing investors are starting to pull from money market funds and similar vehicles and instead plow their cash into dividend-paying real estate investment trusts (REITs), Sam Damiani, a TD analyst said.
Last week the S&P/TSX Capped REIT index climbed around 4.4 per cent, its second-best weekly run since November. “We see further runway,” Damiani wrote in a research note dated Sunday.
Damiani and his team expect Canadian REITs to outperform “as they have in the past similar periods since 1998.” His top picks include Canadian Apartment Properties REIT, Granite Real Estate Investment Trust and Chartwell Retirement Residences.
Canadian REITs have lagged the broader S&P/TSX market since the onset of the pandemic in March 2020 when COVID-19 lockdowns carved into the office commercial real estate sector and ensuing high interest rates weighed on real estate more broadly. The Bank of Canada has now delivered two rate cuts since June, moving the trend-setting policy rate down to 4.5 per cent.
“REITs are still 20 per cent below year-end 2021 levels, reflecting the spike and subsequent volatility in interest rates,” Damiani wrote. “The good news is that those headwinds have rapidly diminished and are starting to become tailwinds.”
Bloomberg.com
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