Canadian Banks & Real Estate

May 22, 2018

Canadian bank stocks and Real Estate Investment Trusts (REIT) are set to do well in 2018 in spite of the potential for higher interest rates.

Canadian banks continue to be steady generators of dividends, benefitting investors who invest in them for income and potential capital appreciation.

They are large and secure franchises which have grown prudently and are expected to continue to be steady performers and dividend growers in the foreseeable future.

As well, Canadian Banks continue to expand their businesses into non-traditional banking areas, such as trading and insurance while maintaining solid mortgage and deposit systems. Some banks are also establishing franchises in the United States and the South American and Caribbean markets.

According to Kroll Bond Rating Agency (KBRA), the financial outlook for Canadian banks is stable and are expected to display stable operating results, solid asset quality, and strong risk-adjusted capital ratios in 2018.

KBRA notes that large Canadian banks have remained resilient, and performed in line with, or exceeded its expectations despite persistent macro uncertainties such as high levels of household debt, exposure to energy and other commodities markets, and greater uncertainty surrounding housing market activities following government measures to rein in house price appreciation.

In the case of REITs, the Canadian market is diversified across several sub-sectors such as the commercial, office, industrial and senior housing markets. Although REITs are more interest rate sensitive than the banks, they provide steady and high levels of income and have proven to be good long-term investments as overall prime property values increase.

As a trust structure, REITs can pay out a large portion of their earned income to investors, making them an attractive option for income-seeking investors.

According to a January 2018 Timbercreek Asset Management report, global REITs are priced to deliver another year of positive total returns in the range of 8 to 10 percent. These returns, according to Timbercreek, will consist of a 4.6-percent cash flow yield and four-to-five-per-cent earnings growth, driven by higher realizable rents as leases expire at below-current-market levels, the completion of redevelopment and development projects currently underway, and new accretive property acquisitions.

In an environment where global equity markets are reaching all-time highs and fixed income faces higher interest rates, Timbercreek believes that real estate offers an attractive source of alternative yield with growth potential expected to exceed inflation. These characteristics, coupled with the diversification benefits that real estate offers, make global REITs an attractive asset class in 2018.

From a rising interest rate perspective, banks have historically benefited from higher interest rates which allows them to increase the spread on products being offered against their internal borrowing rate. Higher rates mean improved profitability, which in turn, positively affects dividends and price performance.

While REITs have historically seen market price declines during periods of high-interest rates, their high levels of distributions make up for the declines in stock prices.

The Harvest Banks & Buildings Leaders Income ETF (HCBB)  takes a balanced approach wherein the manager can actively reduce the exposure to REITs during periods of higher rates and increase exposure to Banks. “HCBB” is focused on a quality North American Portfolio. The mandate is modeled after a Harvest Mutual Fund with an 8 year track record, (as at May 2018).

For more information about the Harvest Banks & Buildings Leaders Income ETF (TSX: HCCB), please click here.

For more information about the Global REIT Leaders Income ETF,(TSX:HGR) please click here.  The Global REIT Leaders Income ETF (HGR) is a unique global portfolio of large cap, dominant real estate issuers in key developed markets, covering 7 core sectors: Retirement & Healthcare, Office, Industrial, Multi-Family Residential, Hotels & Resorts, Specialized, and Retail.

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