Canada's publicly traded real estate investment trusts are expected to improve their financial performance next year.
CBRE, the world's largest commercial real estate brokerage, and TD Securities are looking for some improved results from REITs in 2025. A TD Securities report predicts an approximately 20% return for that industry next year, a forecast that comes after three years of middling returns for the index that tracks the sector. The return represents the annual growth rate of a stock market index.
"After three consecutive years of below-average returns for the TSX REIT index, we expect a bounce back in 2025," analysts Sam Damiani, Jonathan Kelcher and Golden Nguyen-Halfyard wrote in their report. "Our sector pecking order is retail, seniors, residential, industrial, office and diversified."
The trio's top picks for 2025 are RioCan, a retail-heavy landlord, and Chartwell Retirement Residences.
A key variable will be the difference between the Canadian government's 10-year bond yield and REIT yields, they wrote.
"With interest cost headwinds having dissipated across most names, we anticipate accelerating AFFO growth across most sectors in 2025," the report stated, referring to adjusted funds from operations — a key measure of financial performance — after deducting money for capital improvement. "Falling short-term interest rates should produce a tailwind on REIT sector fund flows."
The Bank of Canada lowered its overnight lending rate for the fifth straight time in December, and comments from the central bank about further cuts were pessimistic enough to have some hoping long-term rates will also head lower.
"Normalization of the yield curve should help cause market cap[italization] rates to begin compressing (helping property values), thereby prompting net asset value growth to resume and accelerate," the analysts noted.
Apartment market uncertainty
CBRE said in its 2025 outlook that those projected annual yields could start to fall next year.
"Sentiment has been improving, and stronger investment activity is expected in 2025 as more capital is drawn off the sidelines," CBRE said in its report. "Cap rates for some asset classes are likely to start modestly compressing, but subject to global bond market conditions."
As for the banker CIBC, its analysts expressed concerns that election results in the United States had created a spike in 10-year Treasury bonds. A report suggested persistent and perhaps rising inflation could impact interest rate-sensitive sectors, including REITs.
"As we approach the end of 2024, it has been undoubtedly a volatile period within the REIT sector, created largely by macroeconomic variables, with a reduced emphasis on fundamentals," CIBC wrote.
On the apartment side, BMO Capital Markets, a subsidiary of the Bank of Montreal, wondered what impact a new report from rentals.ca would have. The apartment research company reported this month that asking rents fell to a 15-month low in November.
"We recognize that the data is skewed by fundamentals for more expensive rental accommodations [such as] condos and recently constructed apartment communities," BMO analyst Michael Markidis said in a note. "However, we believe it serves as a reasonable proxy for market conditions for the Canadian apartment REITs. We believe purpose-built apartment market rents have peaked and may be subject to modest downward pressure over the next 12 months."
The TD Securities report expressed similar reservations about the apartment market, noting residential REITs' "muted performance reflected relative valuations correcting from peak levels, decelerating market rent growth, and uncertainty on how Canada's immigration reductions will curtail near-term demand growth."