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A rising interest-rate environment is considered a bad time to invest in real estate equities given the industry’s reliance on debt to run their businesses.
But some investors believe that’s an oversimplified view, including Corrado Russo, senior managing director and head of public real estate investments at Hazelview Investments in Toronto.
Real estate investment trusts (REITs) are still attractive for investors when interest rates are rising because they offer steady distributions based on contractual lease agreements companies have with their tenants, as well as the ability to raise rents.
And while not all REIT sectors are the same – for example, office and commercial spaces have generally underperformed in the pandemic era compared to better performing multi-family residential and industrial names – Mr. Russo says the sector provides recurring income, including in a recessionary environment.
“That contractual lease gives you the protection in a downturn from an earnings and cash flow perspective,” says Mr. Russo, who runs Hazelview Global Real Estate Fund, which invests in publicly-traded REITs mostly outside of Canada.
The REIT market is also different geographically, he notes. While the broader REIT sector is currently down by about 20 per cent in Canada and the U.S., it’s up in countries such as Japan, Hong Kong and Singapore.
“It’s a tale of east versus west,” Mr. Russo says, noting that it’s the inverse of what happened last year, when the U.S. led the global REIT market as its economy was the first to reopen from pandemic-related lockdowns.
Although REITs do tend to suffer at the start of a rising interest-rate cycle, Mr. Russo says they typically outperform broader equities in the longer term. He points to the 27 months between 2004 to 2006 when the U.S. Federal Reserve Board increased interest rates a whopping 17 times, or 425 basis points, to 5.25 per cent from 1 per cent. During that time, REITs rose more than 30 per cent and equities were up 8.5 per cent.
He believes the current rising interest rate market is an appealing time for investors to load up on REITs that are “on sale.”
“That’s not to say we won’t possibly see another 5 or 10 per cent correction from here, but when we sit back two or three years from now … we believe it’s a good entry point,” he says.
“It just feels like you’re getting a strong dividend yield and an attractive price relative to equities and private real estate.”
- Brenda Bouw, special to the Globe and Mail
Must-reads from Globe Advisor this week
How peak inflation still leaves value for inflation-linked bonds
Even if inflation has already peaked, some money managers still see inflation-linked bonds as a major long-term investment opportunity. Real return bonds (RRBs) in Canada and U.S. Treasury Inflation-Protected Securities (TIPS) have been among the best performing fixed-income products this year amid one of the worst bond market sell-offs in a generation. Jameson Berkow speaks to experts who say there might be a period of structurally higher inflation than it was over the past five to 10 years, which makes RRBs and TIPS a good investment.
Six bargain dividend stocks for investors to play a market rebound
Investors may want to do some bargain hunting given that many stocks have been beaten down amid concerns over rising interest rates, inflation, recession and industry-specific headwinds. Even shares of high-quality, dividend-paying companies can get overly punished because of negative sentiment in a sharp, market downturn. That, of course, provides opportunities to buy stocks on sale. Shirley Won speaks to three dividend-fund managers for their top picks.
What to consider before moving back to Canada to retire
The desire to live closer to family, lifestyle reasons, or worries about future health care costs have led many ex-pat professionals who have built their careers in other countries to choose to return to Canada for their retirement years. But for returning retirees who have accumulated assets elsewhere, the move back can come with complexities. Helen Burnett-Nichols reports on how returning retirees can benefit from advanced planning around investments, taxes and cost of living considerations.
Is guaranteed investment protection of seg funds for retirement worth the cost?
Investors nervous about how high inflation and market volatility will affect their retirement income may be considering the security that segregated funds provide as they invest like mutual funds but guarantee part or all of the principal. But these products have their drawbacks including the high cost – making it important for clients to consider the entire picture. Dale Jackson looks at the pros and cons of seg funds and whether the added cost of security from insurance products is worth it.
Also see:
How strong oil demand will keep prices above US$100 a barrel despite recession fears
How to handle clients’ investment concerns during vacations
Tools for ESG investing in mining are emerging but due diligence challenges remain
Global market tumult slows growth in ETF industry
Extreme heat is a wake-up call for investors on infrastructure
What you and your clients need to know
BMO scoops up chunk of CI’s global asset management team
Bank of Montreal’s (BMO) asset-management business has scooped up more than a dozen portfolio managers and equity analysts from CI Financial Corp., as the bank continues to recruit aggressively for its Canadian operation after the sale of its European asset manager last year. BMO announced the addition of 13 experienced investment professionals who cover a wide range of global sectors including health care, technology, energy and resources, financials and industrials. Clare O’Hara reports on what the move means for the industry.
Is Netflix a contrary stock yet?
Netflix Inc. NFLX-Q has had a terrible year and is down around 70 per cent from its peak in late 2021. The pandemic trade that sent names such as Netflix, Peloton Interactive Inc. and Zoom Video Communications Inc. skyrocketing has unwound, and inflation is hitting growth and tech stocks hard. But the streaming giant’s recent earnings results were generally better than anticipated. Still, Philip MacKellar of Contra the Heard Investment Letter explains why he’s taking a pass on buying Netflix on the dip.
What do to if you can’t make mortgage payments amid the correction
Banks are warning that we’re witnessing a historic correction to home prices. Not exactly what you want to hear if you just bought a home with the minimum 5-per-cent down payment. Many insured buyers who purchased near the first quarter’s peak now owe significantly more on their mortgage than their home is worth. Some are more than 10 per cent underwater. Robert McLister reports on what to do if you have clients who are in that situation.
- Globe Advisor Staff