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A rising interest rate environment is seen as a bad time to invest in real estate stocks given the industry’s reliance on debt to run its business.
But some investors think that’s too simplistic a view, including Corrado Russo, senior managing director and head of public real estate investments at Hazelview Investments in Toronto.
Real estate investment trusts (REITs) are always attractive to investors when interest rates rise, as they offer regular distributions based on the lease agreements companies have with their tenants, as well as the ability to increase rents.
And while not all REIT sectors are the same – for example, office and retail space has generally underperformed in the pandemic era compared to better-performing multi-family residential and industrial names – Mr. Russo says that the sector provides recurring revenue, including in times of recession. environment.
“This contractual lease gives you protection in the event of a downturn from an earnings and cash flow perspective,” says Russo, who runs the Hazelview Global Real Estate Fund, which invests in publicly traded REITs, primarily in outside of Canada.
The REIT market is also different geographically, he notes. While the overall REIT sector is currently down around 20% in Canada and the United States, it is up in countries like Japan, Hong Kong and Singapore.
“It’s an east versus west story,” says Russo, noting that’s the reverse of what happened last year, when the U.S. dominated the global REIT market. , as their economy was the first to reopen after pandemic-related lockdowns.
Although REITs tend to suffer at the start of a rising interest rate cycle, Russo says they generally outperform broader stocks over the longer term. It highlights the 27 months between 2004 and 2006 when the US Federal Reserve raised interest rates 17 times, or 425 basis points, to 5.25% from 1%. During this period, REITs are up more than 30% and stocks are up 8.5%.
He thinks the current rise in the interest rate market is an attractive time for investors to stock up on REITs that are “for sale.”
“That’s not to say we probably won’t see another 5% or 10% correction from here, but when we sit down in two or three years…we think it’s a good entry point” , he said.
“It’s like getting a high dividend yield and an attractive price compared to stocks and private real estate.”
– Brenda Bouw, Globe and Mail Special
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