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September 20, 2017 - Articles
Impact of Interest Rate Increases on Canadian Real Estate

We asked our global real estate manager, Timbercreek Asset Management, for their view on interest rate increases in Canada and the impact on the real estate market. Here’s what they had to say: 

Our view on the Canadian interest rate environment is that the Bank of Canada is raising interest rates as a result of stronger economic growth rather than higher inflation. Stronger economic growth typically has a positive impact on real estate fundamentals. As economic conditions improve and companies expand, demand for commercial real estate space will grow, positively influencing occupancy rates. Higher occupancy rates and greater pricing power should result in higher market rents which ultimately leads to higher revenue and earnings growth.

If we look at the last four Bank of Canada tightening cycles going back to 1999, Canadian real estate investment trusts (REITs) underperform the S&P/TSX Composite Index (TSX) leading up to and immediately after the initial rate hike. However, that underperformance (which has already taken place) tends to be short-lived. Over the subsequent 12 months post the initial rate hike, Canadian REITs outperform the TSX by approximately 6%. We believe this outperformance is due to the reasons discussed above, which is an improving domestic economy positively influences real estate fundamentals.

In terms of the positioning of the portfolio, we are focused on owning Canadian REITs that can grow net asset value and benefit from a better growth outlook. The portfolio has positions in First Capital, RioCan, Allied and Canadian Real Estate to name a few, all of which have low leverage, own well-located portfolios and can grow organically. We believe stronger growth and an improving domestic economy should positively influence Canadian REIT share prices over the next 12 months.


Samuel Sahn

Executive Director, Portfolio Management

Timbercreek Investment Management Inc.


Timbercreek Asset Management Inc. manages Counsel Global Real Estate, a component in several of the Counsel Portfolios. Timbercreek's team of portfolio managers, analysts and investment professionals analyze the universe of global real estate securities by evaluating the location of the real estate and its market, the current income stream, the financial strength of the real estate entity, and the viability of the underlying security (whether common equity, preferred shares or corporate debt).


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