With performance in the Canadian stock market being so closely linked to the unpredictable energy sector, it is little wonder that domestic investors are seeking out alternative investment opportunities.
With the low return landscape expected to run for some time in the public market, investors are scrambling to every corner of the market in an attempt to generate yield. Awareness around alternative investments, like Real Estate Investment Trusts (REITs), is on the rise.
“One of the main reasons that REITs play such an important role in a modern portfolio is that they give investors the ability to diversify away from regular equity type stocks and bonds,” says Greg Romundt, President and CEO, Centurion Asset Management Inc. “Real estate is the largest asset class in the world, and should really be thought of as something that is an integral part of an investment portfolio.”
The ability to generate decent yield is the other reason why Romundt believes more investors are allocating to REITs. He points to the fact that there are currently 19 countries across the world with negative interest rates on their government bond curves.
“Even in Canada, while rates have bounced a little bit, they are still puny,” Romundt says. “If you are relying on government of Canada bonds to fund your retirement you’re out of luck. The five year Canada bond yields less than inflation, adjust that for tax and you’re losing money.”
“REITs generally provide a reasonable cash flow that, because of the capital cost allowance in this country, is reasonably tax efficient, so it’s a good source of yield.”
The opening up of the private capital markets in January 2016 was a key moment for the Canadian market. It enabled more investors to invest in private as well as publicly traded REITs. Before then, private equity investments were only available to high-net-worth and institutional investors.
“Provided your asset manager is fee conscious, you can get the same return from a private REIT than a public one, but with much less volatility,” Romundt says. “For example, the vast majority of our investor base is with us because they are looking for an income and volatility profile that is hard to replicate in the public markets.”
The Bank of Canada’s decision to hike interest rates twice this year has had a marginal impact on the REIT market, according to Romundt. And, unlike many industry experts, he does not believe that the central bank will continue to raise rates in 2018.
“We’re now in year eight of a five year business cycle so we are very close to a recession, I’m not talking doom and gloom, it’s just the nature of our economy,” he says. “We had a couple of quarters of decent numbers both in the US and Canada, and the central banks used those opportunities to build some cushioning so they had some stimulus to hand back as soon as the market turns.”
“I think we have to be very careful about asserting that rates are going up. This period of the cycle is over and the Bank of Canada will resume cutting in the not too distant future.”
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