As Canadian REITs Surge in the GTA… Are They Here to Stay?

This post will be 1 of 2.

As Canadian REITs surge in the GTA…are they here to stay?

Canadian REITS definitely held value leading into the New Year.  The question is,  with such economic uncertainty in parts of the world, will they hold value and continue to grow in the GTA?

1)    How do we understand REITs  and their success to date;  and 2)    What impact will this have on Tenants in the Greater Toronto Area (GTA)

Let’s first look at how we understand REITs and their success to date?

A few ideas….

Rates continue to hover at historic lows and will most likely continue to stay there with the US Fed confirming the Fed Funds rate will likely remain low through 2014.Most, if not all, REITs are taking advantage of this by raising funds to retire existing debt to lock in lower rates.A large number of REITs have been doing this by offering preferred shares or convertible debentures.  The benefit with the convertible debenture in particular is a financing method that pays investors less interest because they have potential upside to convert their debentures into common equity if performance continues at these levels.The bottom line for most REITs has improved due to less interest expense associated with their assets held.

In addition to lowering their payments on existing debt through refinancing,

REITs have been taking advantage of low rates to purchase additional properties to utilize excess cash on hand.The volatility and turmoil in the markets has been predominantly due to decreased confidence in the market caused by sovereign debt.  That said, for the most part, companies, on the other hand, have been performing well, have access to cheap capital and have been beating earnings expectations.  This would explain why occupancy ratios remain high throughout most of Canada.Even Fort McMurray has seen a boost in commercial space being occupied, an area that is dictated largely by the price of Oil.   Simply put, REITs are not having to scramble to fill spaces from companies downsizing.  What we could see in the next two years is a big demand for space as companies continue to grow and the effects of pent up demand from companies that held off addressing their expansion needs during the economic downturn.

Lastly, investors have been pushing REITS to new levels due to desire for yield.  GICs, T-Bills, money market funds are yielding next to nothing.  Real Estate has been an area where institutional managers can feel a greater degree of safety placing their money.  Not only are they being provided with excellent yields, real estate is an alternative asset that can perform in inflationary environments, which we could face in two to three years.

So while rates continue to hover at historic lows, look for REITs to hold their value.

What impact will that have on companies / tenants in buildings owned by REITS? Stay tuned for our blog post next week to understand the impact on Tenants.