Canadian real estate investment trusts (REITs) are “better positioned” to outperform most of their counterparts around the world over the next year. That is the word from a number of experts at the 15th annual RealREIT conference held at the Metro Toronto Convention Centre in downtown Toronto recently.
At a roundtable discussion, John Murphy, real estate securities analyst of Cohen & Steers, told a packed room that Canadian retail REIT portfolios in particular look more promising than comparable REITS in almost every country, including the U.S. and Australia. Other nations now face the retail real estate problems that Canada saw with the likes of Sears, Zellers and Target, he said.
On the RealREIT panel, from left: Philip Fraser, president and CEO, Killam Apartment REIT; Jodi Shpigel, senior VP, development, First Capital Realty; and Don Clow, president and CEO, Crombie REIT.
REITS in rental housing “will have a lot of tailwinds going forward” in Canada as enthusiasm for home buying continues to cool, added Murphy.
Kate MacDonald, portfolio manager of global real estate, Signature Global Asset Management, echoed Murphy’s sentiments, adding that apartments and the industrial sector “are enjoying some of the strongest real estate fundamentals.”
Tom Dicker, also on the roundtable, said there is confidence in Canada for good reason. “We have a developed (relatively stable) market, good banks, population growth . . .” Dicker is vice-president and portfolio manager of Dynamic Funds.
Two of four panelists at the morning roundtable forecast Canadian REIT returns over the next year at five to eight per cent, but Murphy was more optimistic, projecting 10 per cent partly because of the “lower for longer” interest rate environment. “Twelve months ago, I would have expected the multi-year tailwind of interest expense savings to be reversing. Now that is not going to happen.”
From left: Tom Dicker, VP and portfolio manager, Dynamic Funds; John Murphy, VP, real estate securities analyst, Cohen & Steers; Kate MacDonald, portfolio manager, Global Real Estate, Signature Global Asset Management; and Derek Warren, VP, portfolio manager real estate equities, Lincluden Investment Management.
Derek Warren, portfolio manager of real estate equities for Lincluden Investment Management, projected REIT growth of five to eight per cent “but with a bit of a rollercoaster in-between.” There will be “a bit of a shift” away from expensive sectors in industrial and residential to diversified sectors, he told the audience.
Tricon Capital Group’s acquisition of Starlight U.S. Multi-Family Core Fund in June is one to keep an eye on, said MacDonald. The move provides Tricon with a multi-family platform that includes 7,300 units in 23 properties. Like Warren, MacDonald forecast mid to high single-digit returns on Canadian REITs over 2020.
Less optimistic was Dicker, who said that a yield of two per cent on REITS next year might be realistic. “The probability that we are in a recession today is not zero (but) they are priced like it is zero. Certain areas are overvalued in this era of scarce growth and recession risk. My best investment idea is: be careful.”
The impact on investments of three key sustainable factors measuring the ethical impact of a company or business was also discussed at the roundtable. Those three measures – environmental, social and governance – represent a company’s ESG. While governance (staffing, for example) is straightforward, Dicker said environmental and social factors are “more nebulous” and therefore difficult to calculate. “There is certainly not a lot of auditing to ensure . . . disclosure of the good and bad of the environmental impact. . .” of a development.
Dicker said, however, that ESG is getting a lot of attention because it might become an important rating factor. “Are we going to see the ‘sustainalytics’ (a country’s risk rating to long-term prosperity) . . . have the type of effect that, say, a bond rating does on publicly traded equities where you get a downgrade in your ESG score and your stock falls a whole bunch the next morning?”
Murphy said Cohen and Steers uses a third-party consultant to help develop its internal ESG scorecard. It evaluates companies in two ways: by their sector and what they are doing (regardless of their property type) to improve their ESG performance.
An example of a company that scores high on “E” in the ESG ratings is a self-storage business because its environmental impact is low. “Their buildings don’t use a lot of energy and there isn’t a lot of car traffic,” Murphy said. “They score very poorly on the ‘G’ because the workforce tends to be high school grads with lower wages than, say, a net lease company that is staffed by 10 finance grads.”
MacDonald said there are only five Canadian REITS with a sustainability score or rating. “It (ESG) is really in its nascent stage. We don’t have a formalized process but increasingly it is becoming a part of our framework.”
She said Global Property Research recently launched three ESG-related indices. “We will be watching very closely how much capital these ESG-oriented indices attract.”
In a second seminar covering REIT risks, panelist Mario Saric, managing director, real estate and REITs, Scotiabank, said of all real estate sectors over the next 12 months, apartments and industrial “still have room to grow.”
Mitigate risks in supply-constrained markets by developing in good locations: high-gross neighbourhoods accessible to public transit routes, added Jodi Shpigel, senior vice-president, development, First Capital Realty.
Most of the panelists agreed that development deals with less than five-per-cent returns were a no-go. But Shpigel told the seminar audience that returns depend on the location in Canada. Five per cent is good in Toronto where cap rates are low but go for higher yields in Montreal because of higher cap rates. “Out west it is the opposite,” she said.
Panelist Hugh Clark, executive vice-president, development Allied Properties REIT, said the size of the development impacts how much risk Allied will take on. The company is less apt to focus on mega projects than smaller-scale ones. “And if it does go bad, earning a five-per-cent return on a $100-million project is much more understandable – and you can recover from it – versus a $1.5-billion project.”
The conference was organized by the Real Property Association of Canada and Informa Markets in partnership with principal sponsor RBC Capital Markets Real Estate Group.
Don Procter is a contributing writer for REM.
