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‘Something’s gotta give’ for Canadian real estate stocks, says BMO analyst

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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

BMO Capital Markets analyst Jenny Ma says “something’s gotta give” in the domestic real estate sector,

“2023 Outlook: Something’s Gotta Give … We approach 2023 with caution as the adjustment process continues and the spectre of a recession looms. 2022 was a tumultuous year for real estate investors, as illustrated by the year-to-date total return of negative 15 per cent for the S&P/TSX Capped REIT Index. Although the sector has rebounded strongly following material down-years in the past (e.g., 2009 and 2021), we believe investors’ expectations should be more tempered in 2023. Valuation screens attractive on a P/NAV basis, but our weighted average AFFO [ adjusted funds from operations] yield spread is below the LTA [long term average]. Capital constraints and the potential impact of a recession on tenant demand are formidable challenges. Our best ideas are Boardwalk, Crombie, InterRent, and H&R”

“Valuation: something’s gotta give. Our coverage is trading at a weighted average NAV discount of 11%. This suggests an attractive entry point when compared to the long-term average discount of 0.9%. On the other hand, AFFO yield spreads (10-year GoCs and BBB Corporate bonds) are well below the long-term average, and the outlook for earnings growth through 2024 is relatively muted.”

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BofA Securities U.S. quantitative strategist Savita Subramanian argued that the upcoming recession will have different effects on markets than previously,

“Throw out the U.S. recession playbook, it is different this time. Reasons include: less smooth earnings for diversified multinationals as globalization takes a pause. Democratized investing, financial asset deflation and job losses in the upper income strata suggest luxury goods may not be defensive, and the wealth effect may be outsized. Oil companies have capital discipline, Tech companies are in regulators’ cross-hairs. Credit risk may be more evident at venture capital, private equity and long duration growth plays than at regulated banks. This isn’t just a narrative, it’s showing up in data.”

“BofA: “Throw out the US recession playbook”” – (research excerpt) Twitter

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Goldman Sachs analyst Brian Singer provided a long list of stocks that will benefit from the clean energy provisions in the recent U.S. Inflation Reduction Act (IRA) legislation,

“Recent commentary from corporates supports our bullish view that the Inflation Reduction Act will be a catalyst for acceleration in Green Capex and benefit stocks through the supply chain. The combination of IRA incentives with the wide discount in electricity/natural gas prices in the US vs. Europe is likely to lead to industrial shifts towards the US, in our view. As more companies discuss 2023 outlooks, we see increased confidence in pursuing projects to take advantage of new and/or expanded incentives, in particular for battery storage, hydrogen, renewables and carbon capture. In this report, we reiterate key takeaways from our August 30 IRA deep-dive on What’s transformational, what’s supportive, what’s underappreciated, discuss what’s new and a roadmap for next steps from corporates and policymakers, and highlight Buy-rated stocks from our analysts across sectors.”

There are too many stocks to list them all but some that are likely to be most of interest to Canadian investors include Sunrun Inc., Solaredge Technologies, Nutrien Ltd., Linde PLC, Air Products and Chemicals, Johnson Controls International, Jabil Inc., General Motors Co., ABB Ltd., General Electric co. MasTec Inc., Waste Management Inc., Vestas Wind Systems, and First Solar Inc.

“GS: stocks that will benefit most from IRA-related green capex,” – (full table) Twitter

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Diversion: “Here Are the 128 Songs That Reached Spotify’s ‘Billions Club’ This Year” – Gizmodo

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Irish Real Estate Returns Drop Amid Higher Interest Rates – Bloomberg

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Irish Real Estate Returns Drop Amid Higher Interest Rates  Bloomberg

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Bank of Canada comments offer light at the end of the tunnel for real estate, mortgage markets, experts say

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Canada’s struggling real estate sector is breathing a sigh of relief, but it wasn’t so much the size of the Bank of Canada’s Jan. 25 rate hike as the language that came with it that was cause for optimism.  

That’s because while the central bank boosted its benchmark overnight interest rate by 0.25 basis points to 4.5 per cent, its eighth consecutive increase, it also signalled it would put the hiking cycle on pause — at least for now.  

“A 25-basis-point increase or no increase was what we needed, along with the kind of language … that indicated we were essentially where we needed to be” Royal LePage CEO Phil Soper said in an interview. “What’s important at this stage is that we’ve clearly come to a point where interest rates aren’t going to be in the news.” 

Soper said the realization that rate hikes will be stopping or slowing should draw what he called the “missing transactions” — those with the capacity to buy but who have remained on the sidelines — back into the market, though it may take some time. 

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Those buyers, he said, have been reluctant because they understand the link between rising rates and prices, and “they don’t want to buy a house today that will be worth less tomorrow.” 

Having some price certainty will make it easier for them to enter the market, but they’ll still need to be comfortable knowing they are paying five or six per cent on their mortgages while others are locked in at two per cent.  

“There’s still many, many people out there with two per cent mortgage rates. Your sister or your cousin might have a two per cent mortgage rate but you’re going to have to pay five,” Soper said. “This will harm consumer confidence until the market has more time to adjust to it.” 

As a result, he said he saw a “muted recovery” in the cards for the spring. 

The pause also signals a light at the end of the tunnel for variable-rate holders, according to James Laird, Co-CEO of Ratehub.ca and president of mortgage lender CanWise, even if it means another dose of short-term pain. 

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Clearview Commercial Realty’s investment funds help expand portfolio

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After 22 years in the Calgary office of a global commercial real estate firm, Steve Vesuwalla started his own company, Clearview Commercial Realty, in 2019. A year ago, he established Clearview Industrial Fund, with all capital raised though Alberta investors.

Its success has been remarkable, with the closing of the first three funds that brought Clearview a portfolio of 300,000 square feet, comprising a 260,000-square-foot building anchored by the north campus of CDI College and a 35,000-square-foot industrial building in South Foothills

The third fund launched in 2022 resulted in a residential project in partnership with NAI Advent.

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Mission 19 is a luxury 67-unit apartment block that will welcome tenants this fall, designed by Gravity Architect and being built by Triumph Construction in the trendy Mission District at 320 19th Avenue S.W.

Last month, Vesuwalla embarked on a fourth — the Clearview Alberta Opportunity Fund — with a goal of raising a pool of equity that will allow his company to act quickly when commercial real estate opportunities arise.

“Successful real estate ventures result from being able to find appropriate investments and having the ability to purchase right away,” says Vesuwalla. “And cash is still king.”

Acumen Capital Partners handled the equity raise and the first round of financing closed last month. A second round is scheduled to close at the end of this month.

The first purchase — in cash — by the new fund is the former Economy Glass building at the corner of 17th Avenue and Centre Street S.W. in the Beltline district.

The 11,500-square-foot building on a .33-acre site has drive-in overhead/roll-up doors, existing office and retail showroom improvements, and highly usable and accessible lower level space.

Vesuwalla is working with a restaurant group and fitness operator to take over the spaces, but the location is ideal for future development as a multi-storey commercial-residential building. That will be planned on the completion of the extension of 17th Avenue across Macleod Trail, giving direct pedestrian and vehicular link access into the Stampede grounds, the BMO Convention Centre expansion and the Victoria Park/Stampede LRT station redevelopment.

No doubt that connectivity will invite further commercial, retail and entertainment-oriented development along 17th Avenue and in the immediate area.

Doug Johannson, executive vice-president at Clearview who joined the company in 2021, has also been busy completing some commercial real estate deals.

Explosive growth in development of commercial real estate in the Balzac area has continued with the sale of 33.85 acres on the south side of Highway 566.

Located between the successful developments of High Plains and Wagon Wheel industrial parks, it was sold by Johannson on behalf of the Abbotsford, B.C., owner to a local developer for $8.8 million.

He was also the broker for the sale of a 17-acre parcel in Frontier Park to Remington Development, and has an unconditional contract to close on the sale of a 43,500-square-foot building on Enterprise Way, between Stoney Trail and the eastern city limits.

Last year was a good one for Clearview and it has started 2023 full of confidence for even better results from commercial real estate transactions, as well as opportunities the new fund will bring.

Vesuwalla and Johannson continue to look for interesting value-added opportunities to increase Clearview’s rewarding portfolio.

Notes:

President and CEO of Bow Valley College, Dr. Misheck Mwaba, has been appointed to the board of the Calgary Chamber of Commerce for a three-year term. “I look forward to working closely with the board on strategic initiatives to address the evolving needs of the Calgary business community,” says Mwaba. “I am acutely aware of the urgent need to develop and retain a world-class talented workforce, nurture a diversified economy and grow our digital ecosystem. Mwaba is a champion of Workforce Integrated Learning (WIL), re-skilling and up-skilling, and takes pride in liaising with Calgary businesses to understand their labour demands.

David Parker appears regularly in the Herald. Read online at calgaryherald.com/business. He can be reached at 403-830-4622 or by email at info@davidparker.ca.

 

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