REIT Investors Get Hit Despite Canada’s Surging Property Market

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Canada’s private real estate market is roaring again after it briefly froze up because of Covid-19. Its stock market equivalent isn’t keeping pace.

Home sales and prices in the nation’s biggest cities have rebounded sharply. In greater Toronto, the average selling price of homes jumped almost 17% in July over the previous year. A national home price index rose 7.4%.

Investors who are getting their property exposure through equities, on the other hand, are having a dreadful time. The iShares S&P/TSX Capped REIT ETF, trading under the ticker XRE, is down 23% this year, excluding dividends, underperforming its U.S. and global equivalents. The Canadian ETF is on pace for its worst year since the 2008 global financial crisis.

REIT Investors Get Hit Despite Canada’s Surging Property Market

It’s a story of too much exposure in the wrong places. Canada’s commercial real estate sector boomed in the decade after the financial crisis, as global investors bid up urban office buildings and strong consumer spending made shopping centers valuable.

The coronavirus pandemic reversed the outlook for both office and retail, causing heavy losses for large Canadian REITs including RioCan Real Estate Investment Trust, Cominar REIT and H&R REIT.

“Retail is the largest weighting currently with just under 30% of the XRE,” Matt Carvalho, chief investment officer at Cardinal Point Wealth, said by phone. “Certainly those have been hurt quite dramatically more -- and I think there’s more uncertainty around just how soon or how much of that retail space that we do need as people start moving more to online commerce.”

Canada’s REIT index also has little exposure to data centers, warehouses, mobile phone towers -- all growing in importance as the masses work and shop from home and wireless companies launch 5G services. The two top REIT holdings in the iShares U.S. Real Estate ETF (IYR) are American Tower Corp. and warehouse facilities owner Prologis Inc.

‘Utility-Like’ Assets

Specialized REITs make up 40% of the U.S. ETF. “That’s a lot of those companies like American Tower or Prologis that have non-retail or non-office type exposure,” said Carvalho, who manages more than C$1 billion ($760 million) for U.S. and Canadian clients. Global diversification helps REIT investors avoid too much concentration in one slice of the real estate market, he said.

The shifting tides caught the attention of Brookfield Asset Management Inc. years ago. The firm is a large owner of office properties and other real estate, of course -- include One Liberty Plaza in New York and Toronto’s First Canadian Place. But in his latest quarterly letter to shareholders, Chief Executive Officer Bruce Flatt talked up the company’s large data infrastructure business.

Brookfield is one of the largest owners of wireless towers globally, has data centers in 14 countries and owns fiber networks, Flatt said. Such assets have utility-like characteristics, he added, especially now.

“The importance of these networks was further reinforced during the pandemic, as access to robust and reliable connectivity became a basic need for performing routine activities such as working from home, remote learning and telemedicine,” he said.

Here’s what happened this week.

Markets -- Just The Numbers

Stocks
  • The S&P/TSX Composite gained 1.1% this week as the nation’s Big Six banks reported fiscal third quarter results. The S&P/TSX Financials Index was the best-performing subindex this week with a 3.8% climb.
  • Toronto-Dominion Bank and Canadian Imperial Bank of Commerce benefited from a surge in trading and higher investment-banking fees in the three months through July, joining Royal Bank of Canada, Bank of Nova Scotia and Bank of Montreal in reporting record profit from their capital markets divisions in the quarter.
  • BMO’s Brian Belski reinstated his year-end target for Canadian stocks. He expects the S&P/TSX Composite to rise to 18,200, a gain of more than 8% over the next four months.
Bonds
  • The Canadian 10-year bond yield fell, pushing yields up to 0.634%. The yield on the two-year benchmark went the other way, slipping to 0.281%.
Loonie
  • The Canadian dollar strengthened 0.64% against the greenback this week, and was at C$1.3094 per U.S. dollar on late Friday afternoon.

Chart of the Week

REIT Investors Get Hit Despite Canada’s Surging Property Market

Economy

Canada’s economy suffered its worst contraction on record in the second quarter, though more recent data suggest a rebound is well underway on the back of massive government aid. Gross domestic product plunged by an annualized 38.7% in the first three months through June, adding to a 8.2% drop in the first quarter, Statistics Canada said Friday in Ottawa. Economists had anticipated a 40% decline.

Bank of Canada Governor Tiff Macklem called for a “sea change” in central bank communications during his remarks to the Federal Reserve Bank of Kansas City’s 2020 Jackson Hole Symposium. He said central banks need to communicate more clearly with the public at a time when the perception of bank independence is under threat and disinformation is rampant.

The number of active Canadian businesses dropped by 14% in the earliest months of the pandemic, according to a government report. Establishments that reported having at least one employee totaled 689,907 in May, compared with 797,582 in February, the last month before Covid-19 caused nationwide lockdowns, Statistics Canada reported.

#TrendingInCanada

A woman in Colorado named Erin O’Toole is getting more Twitter followers after members of Canada’s Conservative Party elected Erin O’Toole as their new leader.

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