For one of the first times in history, Canadian real estate investment trusts are cashing in on a desire for yield-driven stocks. Nearly $1.3 billion have been raised through REITs via share sales since the beginning of September. What’s unusual is that these shares have outpaced any other sector in Canada amounting to a total of deals worth over $6.2 billion.
So hot is the market for real estate that Bay Street has seen six REIT financings this month in what has been described by the Globe and Mail as a “flurry of financings” with fresh cash. The interest by institutional investors in such a sector has skewed market norms.
The main attraction for REITs has been the almost-guaranteed return on investment from commercial real estate, specifically industrial warehouses and rental apartment buildings. This makes sense given the extreme short supply of rental units and various levels of governments co-operating to bring about more purpose-built rental properties.
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In addition, the apartment-focused Continuum Residential Real Estate Investment Trust is attempting a $300-million public offering. Specifically the REIT consists of 32 rental properties totalling 6,271 suites, of which 5,133 are located in the GTA, 581 are in Ottawa and 557 are in London, Ontario.
For comparison, the real estate sector this year raised three times the amount of investor money that the skyrocketing cannabis industry generated in early 2019. And investors show no signs of worrying that a slower economic growth could hurt their bottom lines. “REITs have very attractive cash flow per share growth driven by pipelines of internally generated projects," Sante Corona, head of equity capital markets at TD Securities told the Globe and Mail.
With apartment-focused REITs, high occupancy rates and steady rate increases have meant a near-guaranteed investment. There’s also the factor of a lack of supply of available rental units in Ontario and across the nation. While the picture looks bright for investors, the social cost is remarkably high, pushing many people into unsuitable housing.
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In fact, some apartment REITs have demonstrated that their rents can increase by almost 25 per cent during tenant turnover. Canadian Apartment Properties Real Estate Investment Trust, the largest publicly traded apartment owner, had an average occupancy of 98.3 per cent across its entire portfolio at the end of its last quarter. It’s no wonder there is such an affordable housing crisis in Toronto.
On the investment front, short supply spells good news. Since going public in the first half of 2018, Minto Apartment REIT has watched its unit price jump 55 per cent. Given the unbelievable capital gains, REITs are rushing to finance while they can.
“Our real estate clients have been taking advantage of the positive backdrop to raise equity to finance accretive acquisitions and property development,” Tyler Swan, managing director of equity capital markets at CIBC World Markets, told the Globe.
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Even retail REITs are winning investors back – even in the face of Amazon’s digital sales potentially crushing the brick and mortar retail sector.
“We believe that the headwinds facing the retail sector are indeed real; however, the operating performance of the underlying real estate appears to be at odds with the significant unit price underperformance relative to other REIT sub-sectors," the analysts wrote in a note in early October.
And the gap between the haves and have-nots continues to expand in this country.
