From shuttered stores and offices to surging unpaid rents, US landlords have suffered a body blow this year. And there’s more turbulence ahead, from short-term cash shortfalls to big changes in tenant preferences.
But American property is hardly down for the count. Thanks to the combination of record government fiscal and monetary stimulus and gradual reopening of public spaces, signs of a turnaround are emerging. And that means opportunity to bet on a comeback in selected real estate investment trusts, many of which are down more than 50 percent year-to-date.
It’s likely most investors will look to REIT-focused ETFs to place wagers. And with roughly $3.2 billion in total assets, the iShares US Real Estate ETF (IYR) will attract its share of the money.
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Trading more than 8 million units a day over the past year, iShares REIT is certainly liquid. The Dow Jones US Real Estate Total Return Index it tracks is well diversified with some 113 REITs. And at the current price, the ETF is roughly 20 percent below the all-time set on February 19, leaving room for upside.
There’s just one problem: Despite its name, the Dow Jones US Real Estate Total Return Index is actually a very poor trackers of US property’s fortunes. And that means the iShares ETF is a surprisingly poor way to bet on a recovery.
Let’s start with the fact that not one of the index’s eight largest holdings actually owns office, retail or residential property. Rather, the biggest residential REIT AvalonBay Communities (AVB) doesn’t show up until number nine at roughly 2 percent of the portfolio.
The biggest retail property owner Simon Property (SPG) doesn’t come in until eleventh. And the largest office REIT is Boston Properties (BXP) in 20th place.
Five of the six largest holdings are best described as telecom and Internet infrastructure owners. The biggest and weighing in at more than 10 percent of the portfolio is American Tower Corp (AMT). It’s actually best described as a multinational operator, since nearly half revenue is earned outside the US including emerging markets like Brazil and India.
American Tower has been a very successful company. And the fact management raised the quarterly dividend three times already this year is a pretty clear sign Covid-19 fallout hasn’t had much negative impact on its business to date.
But with American Tower’s shares hitting an all-time high earlier this month, the company clearly has its own internal dynamics and challenges including exchange rate volatility. And they have little or nothing to do with the impact of pandemic control measures on US property markets.
The same is true of the REIT index’ other top 8 holdings, which together make up more than 40 percent of the total portfolio. In fact, these REITs really only have one thing in common with the likes of AvalonBay and Simon: That’s a corporate structure requiring the payout of the lion’s share of earnings in dividend distributions every year.
So far this year, iShares US Real Estate ETF returns have clearly benefitted greatly from holding such a heavy weighting of companies not affected by Covid-19 fallout. For example, Simon is more than 50 percent below where it began 2020. Boston Properties is lower by 30 percent and AvalonBay is off by nearly 25 percent.
This trio rates among the largest and financially strongest REITs in their respective sectors. So, damage has been even worse down the line, including steep distribution cuts across multiple property sectors. But iShares REIT, in stark contrast, has held its year to date losses to only around 7 percent including dividends.
So long as wireless tower and data infrastructure stocks outperform, the iShares ETF will benefit. But the fact their heavy presence dilutes whatever is happening to owners of office buildings, retail centers and residential properties is a double-edged sword. Mainly, they’ll also strongly dilute the favorable impact of a US real estate recovery.
That makes iShares REIT a poor way to bet on property now. And the same is true for the Real Estate Select Sector SPDR Fund (XLRE), which tracks the Real Estate Sector Total Return Index. That ETF is down just 7 percent this year, thanks in part to holding 15.6 percent in American Tower.
Its eighth largest holding AvalonBay Communities is a slightly bigger piece at 3 percent than it is for iShares. But the SPDR Fund is even more top heavy with 56 percent in its seven biggest positions, none of which are residential, office or retail REITs.
That leaves individual REITs as investors’ best property recovery bets, though selectivity is crucial. This month’s canvas of the 70 plus companies in our REIT Sheet coverage universe shows the best in class are weathering this storm. But many others are struggling to keep heads above water.
The steepest plunge has been in retail, where the widespread mall closings have forced once-major companies like J.C. Penny (JCPNQ) into bankruptcy. Shopping center REITs overall reported receiving less than half of scheduled rents in April and May due to tenants’ financial distress.
The best-run owners of office property have collected upwards of 90 percent of rents on time, thanks largely to long-term contracts with committed tenants. But others face a day of reckoning, particularly REITs with tenants in the battered oil and gas industry. And even multi-family residential REITs have reported greater strain than they did in 2008-09.
For REITs, there’s no substitute for strong balance sheets, low cost capital, high quality properties and creditworthy tenants. Those with them are gearing up for growth as once-stratospheric asset values fall to earth. Those that don’t are cutting dividends and worse.
Bottom line: There’s rarely been a better time to buy best in class REITs for high yield and ultimately explosive capital gains, but only if you’re willing to separate wheat from chaff. Anyone who’s not, simply shouldn’t bet.
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
