The prices of global real estate investment trusts will likely rise in 2018, reaching returns of between eight and 10 per cent, according to a report by Timbercreek Asset Management Inc.
“We hear everyday about the continued highs that equities make and continued momentum and the concerns around valuations: Can this keep going?” says Corrado Russo, senior managing director of investments and global head of securities at Timbercreek. Timbercreek is an asset manager focused on real estate and alternative assets.
If growth factors that should boost equities this year, such as technology trends, solid economic growth and tax reform, aren’t as strong, REITs wouldn’t necessarily suffer the way other stocks would, he says. “The REIT market has the ability to create pretty attractive return without having to really rely on some of those growth factors which, if they don’t materialize, could have a negative impact on equities overall.”
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For institutional investors, REITs are a good alternative to fixed-income investments when held for their high dividend yields, says Russo. As well, the dividend yields aren’t fixed, which Russo notes makes them less sensitive to interest rates than bonds and other fixed-income instruments “because you have the ability to grow cash flow with the pace of inflation and the pace of economic growth.”
Domestically, the firm expects REITs that own office and retail locations in major urban centres to remain positive, with further expansion into mixed-use assets, including different types of spaces that support each other symbiotically, adding increased value.
“Large cities in Canada are currently experiencing a wave of gentrification driven by people’s desire to live, work and play in walkable, urban environments,” Russo noted in a press release. “This is creating a number of compelling opportunities for REITs to experience outsized growth and offer increasing value for investors.”
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Larger cities in Canada, such as Toronto, Vancouver and Montreal, are seeing simultaneous urbanization and densification trends, he says. “The cities are going vertical like they never have in the past.”
Diversification of purpose within structures is the way of the future, adds Russo. “If you look at other 24-hour cities around the world, like Hong Kong, Sydney, London, New York . . . the whole mixed-use concept is really tied to the concept of wanting to live, work and play in the same place,” he says.
Canada, however, is still at an infancy stage in that evolution and is still figuring out how to price that value in stocks, according to Russo.
Further abroad, underperformance in European REITs exposed to bricks-and-mortar retail assets should create a buying opportunity for investors seeking higher dividend yields, the report noted. These REITs are cheaper because many investors perceive them to have the same vulnerabilities as the U.S. retail sector, which has been stagnating, says Russo.
“All the retail stocks across the globe have been painted with the same brush but they’re really not the same,” he says, noting Europe has far less retail square footage per capita.
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In the United States, there will be momentum from increasing demand for data centres, he says.
“We all talk about Facebook and Snapchat and Amazon and how that’s driving different patterns within the consumer space, but what we’re forgetting is that creates a massive amount of data and that data needs to travel through structures, meaning cell towers, and all of that data needs to be stored somewhere,” says Russo.
As well, certain U.S. bricks-and-mortar, retail-focused REITs do offer value, specifically non-discretionary, grocery-anchored shopping centres in strong locations, the report noted. Trading at a discount, those securities represent an attractive opportunity to purchase healthy dividend payers.
Temporary lodging should also see a boost since U.S. corporate tax reforms could potentially free up travel budgets that have been tighter since the 2008 financial crisis, according to the report.
Another anticipated effect of U.S. tax reform is the strong cyclical outlook for single-family rental spaces given the new tax penalties for home ownership in high-tax markets, the report noted.
“In the U.S., home prices continue to rise, prompting growth in the rental market led by millennials,” said Russo. “Beyond this, secular growth opportunities exist in the world of technology, value plays in lodging and strong cyclical growth in single-family rentals.”