Diversified holdings underpin First Asset REIT Income Fund’s A+ Award-winning performance

Fundata

Real estate certainly has been in the news a lot these days, at least the residential component. As a result of various restrictive initiatives by federal, provincial, and municipal authorities over the past year to curb what was seen as a runaway “housing bubble,” home prices have subsided over the past year, although the condo market seems to be less affected. Nevertheless, other real estate sectors continue to be strong, largely as a result of our booming economy, and the multiple FundGrade A+ Award-winning First Asset REIT Income Fundhas long been a prime beneficiary.

For the five-year period through March 2018, the fund has generated a very respectable average annual compounded return of 9.0% – particularly impressive given this is an income-generating as opposed to growth-oriented fund. And while the single-family market is being challenged, the fund has considerable holdings in multi-unit rental properties, which may actually benefit from these restrictions.

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“The rental vacancy rate in Canada is 3%, and in Vancouver and the GTA [Greater Toronto Area] it’s even lower,” says Lee Goldman of First Asset Investment Management Inc. in Toronto, portfolio manager of the First Asset REIT Income Fund. “The problem in Ontario is that they’ve placed further caps on rent increases, and while there was a need for controls, they’ve gone too far, and the result is self-defeating because now even fewer rentals are being built.”

Indeed, a recent report commissioned by landlord groups found that 1,000 rental units had been cancelled since Ontario expanded rent control rules across the province, and the result would be a further tightening of vacancy rates. “RioCan is projecting that rents in Toronto will increase to $3.50 to $4.00 a square foot per month, so a 1,000-square-foot apartment would cost $3,500 a month,” Goldman notes.

Meanwhile, other sectors continue to hold up well. First Asset invests in multi-family residential as well as office, retail and industrial properties, with niche holdings in automotive [dealership] and storage REITs, all of which show continuing strength. “The economy is still fairly strong in North America,” Goldman says. “U.S. unemployment is 4% and in Canada it’s in the low fives, so real estate fundamentals are strong across all asset classes, with the exception of Alberta office space due to excess supply as well as the [energy-induced] recession in that province.”

The fund had 39 holdings at March 29, and the top five included Canadian Apartment Properties REIT (TSX: CAR.UN), First Capital Realty Inc. (TSX: FCR), InterRent Reit (TSX: IIP.UN), Killam Apartment REIT (TSX: KMP.UN), and Riocan REIT (TSX: REI.UN).

Goldman admits that the retail sector has been weak too, as a result of e-commerce and changing shopper habits, but believes that concerns about retail bricks and mortar have been “overblown.” “A lot of these companies have very good properties that can be redeveloped and built out by putting residential on top of the retail space,” he says. “RioCan, for example, has a lot of underutilized space that can be changed to mixed use, and that would increase property values.”

The fly in the ointment, however, may be interest rates. “Ten-year government bond yields in Canada and the U.S. are the highest they’ve been in 10 years, and if they move much higher, it could have a negative impact on all real estate valuations,” says Goldman. “That’s one of the keys going forward.”

“The U.S. plans two more rate increases this year, and it will be interesting to see what happens to the yield curve afterwards,” Goldman says. “But Canadian debt – federal, provincial, as well as consumer – is very high, and as a result we’re much more sensitive to interest rates. It won’t take much to cool the economy, so I don’t think Canada will follow the U.S. lead. Personally, I think we’ll likely see only one more rate increase by the Bank of Canada, and not much more.”

Courtesy Fundata Canada Inc. © 2018. Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.Investments mentioned are not guaranteed and carry risk of loss.

 

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