With improving market conditions, REITs may see a significant rebound, offering investors new opportunities
Despite recent challenges, real estate investment trusts (REITs) may be at a turning point due to favourable macroeconomic conditions, according to a report by Hazelview Investments released on August 9.
According to BNN Bloomberg, the report suggests that REITs now present a “compelling case for investing,” supported by healthy fundamentals, low valuation multiples, and a positive outlook for capital markets.
The report highlights that after years of underperformance, REITs might be positioned for significant gains.
“The overall tailwinds for real estate and recent activity we are seeing in the market may finally signal an inflection point for REITs. This combination of factors makes it an opportune moment for investors to consider allocating to this asset class,” the report stated.
Samuel Sahn, managing partner and portfolio manager at Hazelview Investments, noted in an interview with BNN Bloomberg that REITs and the real estate sector have experienced a “significant valuation decline” over the past two and a half years.
This decline was largely driven by global monetary tightening, where central banks raised borrowing costs to combat inflation. However, Sahn sees this trend beginning to shift in favour of REITs.
“Macroeconomic conditions are starting to shift in the favour of interest rate-sensitive industries like real estate, like REITs,” Sahn explained.
He believes that after a period of underperformance, REITs are now poised to deliver significant outperformance in the coming years as their discounted valuations begin to recover.
Other industry experts share this optimistic outlook. Dennis Mitchell, CEO and CIO at Starlight Capital, pointed out that the Bank of Canada’s shift towards rate cuts is providing a boost to the real estate sector.
He highlighted that the central bank’s ongoing rate cut cycle, which began in May, has already led to significant outperformance in their fund relative to benchmarks.
The Hazelview report acknowledges that REITs have underperformed compared to other assets like global equities, citing the impact of the COVID-19 pandemic and subsequent interest rate increases as key factors.
These conditions led to declines in property values and higher borrowing costs, creating challenges for REIT earnings and operations.
However, the report argues that the current environment presents a substantial opportunity for investors. “Depressed REIT prices, coupled with the possibility of future rate cuts, present a considerable opportunity for investors,” it states.
The report also emphasizes that operating fundamentals for REITs remain strong and that anticipated interest rate cuts in Canada, Europe, and the US could further enhance the attractiveness of REIT investments.
Sahn also pointed to other factors contributing to the opportunities in the REIT sector. He noted that the lack of new supply in the market is benefiting REITs by positively influencing net operating income (NOI) margins and bottom-line results.
Additionally, as interest rates decline, the refinancing of debt will reduce headwinds, allowing more cash flow to enhance profitability.
Sahn further explained that public real estate markets offer investors unique exposure to specific industries and property types that might otherwise be inaccessible.
For instance, investing in REITs allows individual investors to gain exposure to sectors such as senior housing in the US and Canada, as well as data centres worldwide.
