A corner of Canada’s red-hot property sector is in a funk: shares of real estate firms are in their longest losing streak since January.
The S&P/TSX Composite Real Estate Index fell 1 per cent on Friday, for its fourth week of losses amid rising bets of interest-rate hikes at the Bank of Canada and the Federal Reserve to curb increasing consumer prices.
The spread of the omicron variant may also be hurting the sector which is comprised of office and retail-heavy REITs.
At the end of October, the Bank of Canada said it could increase interest rates as early as the spring to combat accelerating inflation, putting pressure on borrowing and constructions costs.
“It was in November when the alarm on inflation really started to sound,” Bank of Montreal analyst Jenny Ma said in a phone interview. “That’s what started to give investors pause.”
Some of the largest real estate investment trust or REITs are weighing on the sector. Residential-heavy Canadian Apartment Properties REIT, known as CAPREIT, sunk 5.9 per cent in the month of November, its biggest drop in more than a year.
Beyond inflation, concerns around the omicron variant has further dragged on retail and restaurant REITs, such as RioCan Real Estate Investment Trust. The shopping center property owner tumbled 4.7 per cent in November, its biggest monthly drop since September 2020. Allied Properties Real Estate Investment Trust, which owns office space, lost 3.6 per cent last month.
Heading into 2022, rising rates may not necessarily continue to plague real estate firms, according to Ma. As the economy rebounds, and people return to the office and start dining and shopping, developers and property owners could see a boom from spiking activity.
The sector is still outperforming this year, surging 26 per cent compared with the S&P TSX Composite Index, which climbed 18 per cent.
“The REITs have been to hell and back with the pandemic, so we’ve seen how they hold up in the worst of the worst,” Ma said. “Absent omicron causing restrictions, this would be an opportunity for investors to augment their positions in the REITs where they see growth.”