Buying a house isn’t the only way to invest in Canada’s sizzling real estate market. Real Estate Investment Trusts are up more than 20% this year, outperforming the TSX by nearly 10%. Cathy Carlin, Senior Portfolio Manager at TD Wealth, explains how REITs could benefit from real estate becoming a stand-alone sector in the TSX.
But my next guest says coming changes to the TSX could mean greater demand for REITs.
Joining me to explain that is Cathy Carlin, she's Senior Portfolio Manager with TD Wealth.
So nice to have you here.
Nice to be here, Kim.
So explain this to me like I'm six.
I always start off with that.
What is the change that's happening to the TSX that's going to affect the REITs?
So what you're talking about is a change to the way they calculate or the way they put forward the sector.
So traditionally, the indexes have 10 sectors.
So all companies are grouped into-- Materials, or sorry, materials, financials-- Industrials, consumers.
They're all grouped into 1 of 10 sectors.
So a couple of years ago, the index providers did a study.
And they said, should we pull REITs out of the financials?
Because REITs had been buried in financials along with the banks and the life insurance companies, so that's a big sector.
So they are going ahead, they made the decision to go ahead and pull the REITs out of that big sector.
And as of the end of August, real estate is going to be its own 11th sector.
So there's 11 sectors.
Why does that matter?
Why does that actually stimulate some sort of demand for REIT stocks?
Well, as I said, real estate was buried in a big sector.
So the financial sector in Canada is 35%, 36%, 37%.
Real estate is about 3%, 3 and 1/4%, so quite small.
So it's been easy for some big investors almost to ignore it.
They've got lots of banks.
They've got lots of insurance companies.
Maybe they don't have to worry too much about real estate.
Now that that's getting set out separately as its own sector, it's going to be a little bit harder to ignore.
Some of the big investors, actually, are required to have some exposure in every sector.
Oh, so they have to?
Yeah, yeah, interesting.
So if they have to do that, then what you're saying is you're going to see some index buying coming in and picking up a weight, and therefore could see some movement up in the REITs.
And I wouldn't say necessarily so much index buying, because the indexers probably already had them.
But some of the others that make the active decision to say, I've got enough banks, I've got my financials covered, I haven't really had to worry about REITs, now they may have to take a look at that sector.
So these are like the institutional players or something like that.
Mutual funds, pension funds, that sort of thing.
World you came from I think is a mystery to many people, but you know it well.
Now, what's interesting about this as well, though, is the REITs have already been performing exceptionally well compared to the TSX at this point.
So why have they done so well?
What's been the attractiveness to many investors?
Well, REITs, for sure, and real estate companies benefit from very low rates.
And we've also been in a very low-growth environment.
So for the past number of years, REITs have done OK, but the banks have done quite well.
And the life cos have done OK, too.
More recently, with the stronger headwinds for the banks, it's been tougher for them to grow.
So I think that there has been more attention focused on the REITs.
I was just speaking, actually, with Don Campbell who gave you a delightful segue.
You probably couldn't hear it.
But he was saying he actually really likes REITs right now in terms of how to play real estate in general.
But what REITs have been doing better?
Because you have retail REITs, you have commercial.
You've got different kinds of REITs.
So what's been doing better?
So within each sector, there are subsectors.
And I'm not sure which one has done particularly better in terms of sector.
Certainly in Canada, there have been headwinds for any of the REITs or the real estate companies that have had exposure in Western Canada.
We really like diversifying across sectors, across geographies.
And so to own, if you're going to invest in REITs or in real estate, it's a good idea, we think, to own some apartment properties, shopping centers, office, if they're in the right location, but to make sure you've got diversification across the asset classes.
What would you say-- it's interesting, because I guess with REITs, and you talked about diversification.
One of the stories was the big stories last year Target, you would think a very safe anchor for any kind of REIT or a real estate manager, out.
So is the retail environment a little bit concerning, perhaps, for some of these REITs?
Because we're not booming right now.
I'd say, with exception of Home Depot or some of the housing side of things, we're not really seeing strong retail side of things.
No, not really.
And it's interesting that you raise the example of Target, because they were a big tenant in RioCan REITs portfolio.
And that's actually one of the ones that I like, that our team likes.
And it's interesting what happened.
So it was a blow to them, not huge, but it was certainly a blow to them when Target vacated the leases and the properties.
But actually, what they've been able to do since then is quite remarkable.
They have been able to release a lot of those stores or those locations to the point where, over the next couple of years, they're actually going to be getting more revenue than what they would have been getting if Target had stayed in those leases.
So to make sure that you are looking at companies that have great locations, that have excellent management teams-- and RioCan would be an example of that-- it actually hasn't been such a bad thing for them.
Another one you like right now is Canadian Apartment REIT.
Now, why do you like that?
Well, we like the apartment or the residential sector.
We think there's a lot of stability there.
This is also a very big REIT.
They've got very strong occupancy levels, 98%, 99% occupied.
We like the diversification within that REIT.
So they are across Canada.
They're not just in one geographic region.
They're also diversified across property types.
So they've got luxury apartments.
They've got affordable apartments.
We like that a lot.
And they also have the capital.
They've been doing some acquisitions, so they've been adding new suites as they go through.
They also pay a 4% yield, so that's one of the benefits of REITs to investors.
In a low rate environment, to find yield somewhere is great.
And if you can find a little bit of growth along with that yield, even better.
We like that.
Cathy Carlin is Senior Portfolio Manager with TD Wealth, and she joined me here in studio.