Scotiabank analyst says senior housing standing out in REIT sector
As global markets reel from the impacts of US President Donald Trump’s tariff policy, defensive strategies have become increasingly attractive to advisors and investors as a hedge against ongoing uncertainty and volatility.
Himanshu Gupta suggests the Canadian REIT market is no different, pointing specifically to the senior housing sector, which he says holds a combination of strong defensive qualities, appealing demographics and a compelling supply-demand balance.
“The REIT sector is economically sensitive to GDP, to recession, to downturns. And in the current environment, defensive REITs have outperformed the REITs which are more economic sensitive right now,” said Gupta, equity research analyst at Scotiabank. “If we were to see further downgrade of the GDP growth expectations because of the tariff scenario, we could see continuation of defensive REITs outperforming.”
Amid the ongoing economic volatility from US President Donald Trump’s tariff policy, Gupta suggests advisors and investors are in a favourable position to enter the REIT market, which he says is currently discounted by almost 20 per cent to the NAV. He adds that any resolutions to the US tariff situation would increase the long-term prospects of the REIT sector.
“The yield looks good and the leverage is much better positioned as well,” he said. “And any positive news around tariffs will help the overall REIT sector perform well in the coming years.”
One of senior housing’s most attractive aspects in an economic downturn is its demographic-based demand, according to Gupta. Canada has an aging population, with the 85-year-old plus population potentially tripling over the next 25 years, according to StatCan. Gupta says that these demographic figures combined with the resilient nature of senior housing is providing a healthy outlook for the sector.
“In the last three or four recessions, healthcare REITs and senior housing REITs have actually outperformed because of their defensive business model,” he said. “If you're an 85-year-old senior, you don't check what the GDP growth outlook is going to be in the next 12 months before you sign up into a retirement home … it's very rare combination of growth and defence as well.”
COVID heavily impacted the senior housing sector, with occupancy rates dropping from over 90 per cent in during the pandemic to just under 80 per cent after COVID. Gupta says that the supply for senior housing has remained relatively flat in recent years, and he predicts the supply side will only catch up with demand in 2029 or 2030. With this in mind, Gupta says senior housing could see a “golden set up” as increasing demand piles pressure onto a limited supply.
Industrial and office REITs have seen a double-digit plummet in performance recently, with Gupta pointing to their intrinsic link to the pressures of the current market downturn. He also sees strong tailwinds in the grocery REIT sector, which like senior housing is less affected by negative market forces.
Demographic changes are also a major factor in the apartment sector, which Gupta classes as a middle ground for defensive REITs, as it is still vulnerable to economic pressures, but not as exposed as office or industrial REITs. Canadians will of course still need housing throughout a recession, but Gupta points to rising unemployment and declining GDP as potential roadblocks to positive returns in the space. He says changes to immigration policies that are expected to result in a decline in Canada’s population growth will challenge the apartment sector.
“The apartment sector is not as defensive as senior housing, and it's neither as economic sensitive as industrial or office for that matter. So it's kind of somewhere in between,” he said. “If you were to see further rise in unemployment, a further downgrade in GDP, it will impact many real estate sectors, including apartment.”
