Derek Warren, Vice President & Portfolio Manager, Lincluden Investment Management

Focus: REITs

Top picks: Choice Properties, RioCan, Pro REIT

MARKET OUTLOOK:

The market for real estate is shaping up well for 2025. Bond yields and borrowing costs are coming down which is good for real estate investment trust (REIT) balance sheets. Prices have reset and the stocks are offering attractive yields and improving fundamentals.

We are also seeing many REITs take advantage of the return of liquidity in the commercial property markets, by selling off non-core properties and using the proceeds to pay down debt. Retail is the strongest asset class as leasing rebounds from pandemic lows.

Apartments sold off this year due to fears of lower immigration, however this appears overdone. The office market has bottomed and should see gradual improvement over the year as people return to the office and companies re-configure office space to match the hybrid needs of their staff. Industrial is a more balanced market and will likely trade in line with economic growth.

It is hard to say at this time how the threats of tariffs will affect the Canadian economy, however domestic REITs may provide some protection from tariffs, particularly Canadian REITs that are focused on domestic consumption, such as those anchored by our main retail and grocery brands.

The U.S. reliance on Canadian oil may also provide relative protection to REITs with large Alberta holdings, and retirement homes would be largely unaffected. Many REITs also have significant U.S.-based portfolios. Canadian REITs are trading valuations that look attractive historically and are a solid source of yield in uncertain times. We remain cautiously optimistic.

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TOP PICKS:

Choice Properties REIT (CHP-UN TSX)

This REIT is anchored by Loblaws and related brands. These retail centres are well located and focused on the daily needs of Canadians. Choice also has an industrial portfolio that is high quality. Property location, management, and balance sheet are all top notch, making this a core holding for any investor.

RioCan REIT (REI-UN TSX)

RioCan is refocusing its attention onto its strengths, which is managing great urban retail properties. This will involve getting away from the distractions of its apartment developments and using proceeds to improve its balance sheet, and we feel these improvements will be rewarded by the market.

Pro REIT (PRV-UN TSX)

Pro REIT is our preferred small cap REIT, with a yield of 8.75 per cent. The portfolio is focused on quality industrial properties in secondary markets, with over 50 per cent in Atlantic Canada. This is a stable portfolio with good management and a sustainable dividend.