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.
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).
This report may contain forward-looking statements which reflect current expectations or forecasts of future events. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as: “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “preliminary”, “typical” and other similar expressions. In addition, these statements may relate to future corporate actions, future financial performance of a fund or a security and their future investment strategies and prospects. Forward-looking statements are inherently subject to, among other things, risks, uncertainties and assumptions which could cause actual events, results, performance or prospects to differ materiality from those expressed in, or implied by, these forward looking statements. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, the volatility of global equity and capital markets, business competition, technological change, changes in government regulations, changes in tax law, unexpected judicial or regulatory proceedings, catastrophic events and the ability of the investment specialist to attract or retain key employees. The foregoing list of important risks, uncertainties and assumptions is not exhaustive. Please consider these and other factors carefully and not place undue reliance on forward-looking statements. The forward-looking information contained in this report is current only as of the date of this report. There should not be an expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. The indices cited are widely accepted benchmarks for investment performance within their relevant regions, sectors or asset class, represent non-managed investment portfolios, exclude management fees and expenses related to investing in the indices, and are not necessarily indicative of future investment returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.