One chief investment officer predicts investors will move back into real estate investment trusts (REITs) as borrowing costs move lower.
John Ewing, the chief investment officer at Ewing Morris Investment Partners, said in an interview with BNN Bloomberg on Tuesday that he thinks “we’re at the beginning of a big rotation back into REITs,” despite the sector’s underperformance last year and the first part of this year.
Ewing’s comments come amid broader enthusiasm for the REIT sector among other market participants and expectations of a pivot from the U.S. Federal Reserve to cut rates in September alongside the Bank of Canada.
“As rates come down, I think you’re going to see a lot of people cash in their GICs (guaranteed investment certificates), term deposits, and rotate back into REITs where you can still get a five per cent, six per cent, sometimes seven per cent yield with really good tax characteristics,” Ewing said.
However, he noted that the rotation back into the sector could be slow-moving due to the fact that investors may wait for GICs to mature before rotating into REITs.
“We really like commercial real estate, outside of office, and retail real estate I think is our favourite sector where we just think the fundamentals are great,” he said.
Within the retail real estate sector, Ewing said he specifically likes First Capital REIT.
“It’s a big grocery-anchored retail REIT, and we really like it for three reasons. You’ve got first, fundamentals are great, big population growth continues in Canada, and nobody’s building new grocery stores, so rents are going up,” he said.
Secondly, Ewing said First Capital has the “best assets in the space.”
“The third one is around valuation, where we think First Capital is a prime takeover target,” he said.
“The stock has moved up. But still trades at a 20 per cent discount to its net asset value. We think that net asset value is firm. Every quarter, they’re out selling properties at 10 per cent, 20 per cent, sometimes 30 per cent premiums to net asset value. And we know that there are institutional buyers out there who would love to own some and in a few cases all of this portfolio.”
Despite Ewing’s enthusiasm for REITs going forward, he said he has concerns about the office market.
“You’ve got vacancies, depending on the city but call it 20 per cent in offices across Canada, and you can’t raise rents when there’s that much empty space. And lenders hate office right now. And so if you can’t raise rents and you can’t borrow money, real estate doesn’t work very well,” he said.
Alberta optimism
Ewing added that he is also bullish on the Alberta real estate market.
“I think if Alberta was its own country…it would be the fastest growing country in the world right now population-wise,” he said.
“Supply is just not keeping up and real estate’s all about supply and demand.”
Within the Alberta market, Ewing said he likes Boardwalk REIT due partly to its apartment assets.
