Is the threat of higher rates bad for REITs? Not if those rates signal improved economic growth, says Timbercreek Asset Management in its latest report.
In fact, REITs are poised to deliver 8.5% to 10.5% total returns in 2017, reveals the report.
“We believe a rising interest rate environment signals a brighter economic outlook and a return to moderate inflation, which means more people working in office building, more household spending and more income on travel and hotels,” says Corrado Russo, senior managing director of investments at Timbercreek, in a release.
Read: Pressure points for U.S. commercial real estate
In Canada, REITs with portfolios concentrated in major urban centres have a particularly positive outlook, because of strong demand from tenants for well-located, high-quality shopping centres.
The report notes that vacated Target stores outside urban areas are taking time to back-fill and will likely entail “elevated redevelopment expenditures.”
Other Canadian highlights:
- The national apartment market will remain attractive, with asset values supported by immigration, limited new supply and deterrents to home ownership, including high prices for single-family homes and stronger mortgage rules.
Read: Toronto-area home sales hit record in 2016
- The steep decline in oil prices that created a divided market — evident in the strong Toronto and weak Calgary office markets — will continue in 2017.
For U.S. REITs, the report predicts a bullish outlook based on Trump’s potential fiscal policies:
- Lower taxes and high employment will boost consumer spending, benefiting industrial real estate.
- Infrastructure spending will drive up labour and construction costs on commercial real estate. Further, higher inflation could stymie new supply, while lower supply and higher replacements costs are ultimately a positive for existing real estate assets.
- In the U.K., London’s real estate market, in particular, remains under a cloud of uncertainty after Brexit. (Read: U.K. economy ended 2016 on a high note)
- In Japan, lodging will generate the highest net-operating income growth in 2017 as the country prepare to the 2020 Tokyo Olympics.
- In Hong Kong, the office market looks attractive because of low supply combined with strong demand from Chinese financial institutions.
Read the full report here.