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Will Canada’s housing bubble burst in 2022? Industry experts said a 41% drop in home sales in Toronto last month is a significant milestone. Aside from high borrowing costs, a proposed two-year moratorium on foreign ownership could calm a fiery real estate market.
“Based on trends observed in the housing market in April, it certainly appears that the Bank of Canada is meeting its goal of slowing consumer spending as it combats high inflation,” said Kevin Krieger, president of the Toronto Regional Real Estate Board (TRREB).
Krieger added that some potential home buyers are also delaying purchases due to higher negotiated mortgage rates. However, many first-time homebuyers are hoping that home prices will rise soon. The federal government is also working to correct market imbalances by implementing measures to increase supply or inventory.
On the investment front, real estate investment trusts (REITs) are also in the spotlight. There are concerns that the asset class will suffer a backlash due to recent developments. However, fears may be perceived more than real because REITs do well during high inflation. Furthermore, Canada’s top landlords reported strong financial results and strong demand.
Reclaiming retail space
ryokan (TSX: REI.UN) is among the most attractive options in the real estate sector at the moment. The owner and operator of a $6.56 billion mixed-use property is slowly recovering from the fallout from the pandemic. In the first quarter of 2022, committed occupancy increased to 97%, while net income jumped 50% to $160.1 million compared to the first quarter of 2021.
Notably, rent collection of 99.1% for the quarter was in line with pre-pandemic levels. “We have continued to advance our strategic goals from a position of strength, driven by the quality of our portfolio, the resilience of our tenants, and the ability to implement our growth initiatives,” said RioCan President and CEO Jonathan Getlin.
Gitlin also noted the strong demand for retail space in the second quarter of 2022. He said the increased demand stems from the lack of new, well-positioned retail space built over the past decade. He revealed that American and European companies have expressed interest in the REIT and that they are potential tenants.
As of May 11, 2022, this real estate stock is trading at $21.18 per share and paying a dividend of 4.86%.
Strong rental momentum
Industrial REITs have had consistent performance so far in 2022, and Dream Industries (TSX: DIR.UN) is the leader in this sub-sector. In the first quarter of 2022, the $1 million REIT generated net income of $442.88 million, which is an increase of 364.9% over the first quarter of 2021. Funds from operations grew 62.2% year-over-year to 56.63 Million US dollars.
Apart from the strong rental momentum, attractive rental spreads and strong contractual rental growth, the portfolio quality upgrade continues. “We have focused on enhancing the resilience of our balance sheet by moving to a primarily unsecured financing model,” said Dream Chief Financial Officer Lenis Quan.
Based on market analysts’ forecasts, the current share price of $13.59 could increase 36.5% to $18.55 in one year. If you invest in Dream Industrial today, the dividend yield is 5.19%.
While higher interest rates push potential buyers to the sidelines, REITs remain profitable investment options. RioCan and Dream Industrial can provide similar rental income at lower capital cost.