Will REITs remain profitable?

The Canadian housing market is in good shape.

Though sales and listings have been slow, Canadians have no reason to worry, says Barry Morrison, CEO of Aston Hill Institutional Partners.

He adds, “I don’t think we’re facing a situation where there’s a lot of unsold housing with depressed prices. It’s not a U.S. housing market, [and] when houses are priced properly, they sell very quickly.”

Read: No housing bubble, says Scotia

Even in the more volatile U.S. market, Morrison finds the number of foreclosures is falling and prices are starting to rise once again.

The good news is housing market activity doesn’t generally impact the performance of REITs. That’s because most trusts focus on the commercial sector, says Morrison, with many investing in office buildings and shopping centers.

Read: Canada’s commercial property market expanding

These commercial spaces “don’t really get affected by the housing market, although the apartment market can be [impacted],” he concedes. He adds you really can’t buy a REIT that’s involved in the housing market. They’re two different markets.

Clients may see a connection, however, says Morrison. People base a lot of their spending on the value of their houses, which means the commercial sector is often impacted by dips in housing, as was seen in the U.S.

Read: Consumer confidence sinks

Overall, Morrison says REITs “have dependable, growing income. But the real advantage has been the decline in interest rates. This not only benefits their financing needs on properties, but also the cap rates and the values of their properties.”

Read: REIT spinoffs create value

It’s been a tremendous environment for real estate trusts due to the fall of interest rates, which have declined to the lows of last summer.

However, he warns we’ll be faced with rising rates at some point. “In our own funds, we’ve had large overexposure to the real estate trust industry,” says Morrison. But he’s pulled back to a market level and is considering decreasing that exposure even further.

That’s because real estate would be extremely vulnerable to rising interest rates. “A rising cap-rate scenario could affect the value of a lot of [real-estate] securities. It won’t affect the operations of the companies, but may impact how their stocks do in the market,” he says.

Read: REITs offer long-term stability

Another reason he’s start to pull back is people aren’t as dependent on malls and stores having physical locations any longer. He says, “On Cyber Monday, 51% of the sales in the U.S. were online. Do we really need all this retail space going forward?”

Over the next 10-to-15 years, Morrison adds, big real estate players will have to closely watch the vacancy rates of their commercial holdings.

Read: The REIT solution