The firm, which uses a bottom-up fundamental analysis, says these expected returns will consist of:
- cash flow yield of 4.6%;
- earnings growth of 4% to 5%, driven by higher rents as leases expire at below current market levels;
- little growth in occupancy; and
- 50 basis points from rising global interest rates.
The report says REITs are attractive (if not cheap) versus equities since they underperformed equities by almost 12% last year, and by more than 300 basis points in 2016.
Within the Canadian real estate sector, the outlook is particularly positive for REITs that own office and retail assets with infill development opportunities in urban areas such as Toronto, Montreal and Vancouver.
Timbercreek says Canadian smallcap REITs and REITs that own assets internationally (in Europe or the U.S.) are fundamentally mispriced and poised to deliver better than average returns in 2018.
Here are highlights for other top REIT choices:
- U.K. and Continental Europe. Economic and property fundamentals continue to improve and broaden, with GDP growth in Ireland, Spain, Germany and Sweden forecasted at about 3% in 2018. The underperformance of European retail REITs in the bricks and mortar and residential sectors is expected to generate higher than average dividend yields.
- Japan. Recent underperformance of Japanese real estate companies have made valuations more compelling heading into 2018. Further, economic conditions are improving led by small and medium business growth, accelerating prices, higher industrial production and rising employment.
- Hong Kong. Office companies with a strong presence in decentralized submarkets (such as Admiralty and Island East) are favourable and will benefit from growing demand for high-quality international tenants.
- Australia. Expect attractive income from smaller-sized REITs that invest in niche-oriented sectors such as education, entertainment and self-storage. In the office sector, Sydney and Melbourne remain pillars of strength.
For more details, read the full Timbercreek report.