As analysts foresee an interest rate surge arising from US President-elect Trump’s expansionary policies, RBC Capital Markets has predicted trouble for Canadian REITs, says a report from the Financial Post
According to the report, Republican control of the House of Representatives coupled with Trump’s presidency has increased the likelihood of many of his policies getting passed. Economists view some of those policies, particularly increased government spending and tax cuts, as very inflationary.
A resulting increase in interest rates, the commentary said, would harm REITs that have thus far been attractive to investors for their typically higher yields relative to other stocks.
“In a rising interest rate environment, we believe virtually no REIT or REOC share price will be ‘spared’,” said RBC Capital Markets Canadian equity strategist Matthew Barasch. “[T]he long-term trend in interest rates (i.e., downward) has provided a tailwind to the sector through much of the prior two-plus decades.”
“Assuming that one of the outcomes of President-elect Trump’s policies is higher interest rates (stemming from much larger borrowings and deficits), then the impact on listed property stocks would seem directionally, to be a headwind,” said Barasch, who downgraded his recommendation for REITs in portfolios from overweight to market weight.
He qualified that REITs with exposure to energy infrastructure are an exception, as Trump’s pro-energy policies could increase demand and spur growth in Canada’s oil and gas sectors.
“[Increased chances of bigger spending and tax cuts] should have favourable implications for US real GDP growth,” he said. “Higher growth spurs greater demand for hydrocarbons.”
The REITs and REOCs listed by Barasch as deriving at least one third of their total net operating income from energy-focused markets were Melcor REIT, Melcor Developments, Boardwalk REIT, CREIT, Morguard REIT, Dream Office REIT, Artis REIT, and Brookfield Canada Office Properties.
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