Robert Palmer, CFO of Calgary-based Northern Properties Real Estate Investment Trust.
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 parts of the traditionally conservative sector, analysts say.
Canadian REITs are listed on the Toronto Stock Exchange (TSX) and have out performed the broader S&P TSX stock index in the past 12 months, with a return of 9.5%. In the day following the January 21 surprise cut in the Bank of Canada (BOC) overnight lending rate from 1 per cent to 0.75 per cent, trading in REITs rose nearly 30 per cent in volume. 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, adding 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 (NP REIT) – its portfolio includes multi-family properties in Abbotsford, on Vancouver Island and in Fort St. John – said NP REIT is holding up to 400 mortgages at any time, typically with 10-year terms. Palmer said commercial lending rates have come down since the BOC rate setting: 10-year term mortgages on its multi-family rental buildings, for example, are now in the 2.4 per cent range. “We have even seen lower rates than that,” Palmer said.
“Interest rates are definitely an important factor for us,” he said, “but they are not the only factor.” With 25 per cent of NP REITs properties in Alberta, including the oilands centre of Fort McMurray, the direction of oil prices is a concern, he said.
“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 actually 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,” Russo said, adding that lower gasoline prices could boost retail sales, “partially offsetting any future slowdown in economic growth,” he explained.
“All-in-all, we expect positive returns from Canadian REITs in 2015,” Russo said.
