Corrado Russo, Hazelview Investments’ senior managing director of investments and global head of securities. (Courtesy Hazelview)

Canadian REITs are expected to offer total returns of 10 to 12 per cent in 2021, lagging the 15 to 20 per cent projected globally, according to Hazelview Investments‘ Corrado Russo and its 2021 Global Real Estate Outlook.

Hazelview (formerly Timbercreek Equities Corp.) invests in, owns and manages global real estate. It manages $8.9 billion in assets and employs a global investment and asset management team of more than 70 in offices in Toronto, New York City, Hong Kong and Hamburg.

“I think Canada will underperform a little bit,” said Russo, senior managing director of investments and head of global real estate securities at Hazelview, “given the challenges around some of the retail and office exposure, and given the challenges around oil pricing and how that might impact the economy, and given some of the challenges in terms of how much money Canada has spent relative to some other markets in dealing with COVID and how that might stifle GDP growth a little bit, and given the lack of some of the niche-oriented sectors that have growth opportunities, like data centres, cell towers, self-storage and industrial.”

Canada has no cell tower REITs and none exclusively dealing with data centres. The country’s only hotel REIT, American Hotel Income Properties REIT (HOT-UN-T), is headquartered in Canada but all of its properties are in the U.S.

However, Russo said some active investors could achieve higher returns.

“I think if you can select the right ones (REITs) at the right time, you can probably achieve 15 to 20 per cent (total returns) in Canada as well,” said Russo, who joined Hazelview in 2011 and has more than 20 years of experience in investment management.

REIT valuations and prospects for 2021

Global real estate security valuations ended 2020 down 10.5 per cent in local currency, lagging most other sectors, according to the report. However, since COVID-19 vaccine announcements were made late last year, they’ve experienced strong gains and outpaced global equities.

Nevertheless, global REIT valuations are at their cheapest and most attractive level relative to equities in more than 15 years.

Hazelview foresees 2021 marking the beginning of “the great REIT-opening,” where REITs begin to outperform other industries.

REITs are expected to see a convergence of fundamentals and performance between “have” and “have-not” sectors, and lower unemployment should lead to stronger demand for commercial real estate.

Among asset classes last year, data centres performed the best while regional malls were the worst. Data centres, industrial, self-storage and cell towers had positive returns, while multifamily, triple net lease, healthcare, diversified, office, shopping centres, hotels and regional malls had negative returns.

REIT investment categories

Hazelview separates REIT investment sectors into four categories.

The first offers good fundamentals that will continue to experience strong tailwinds in 2021 while trading at reasonable valuations. Industrial, self-storage and cell tower REITs are in this category.

The second offers poor fundamentals, either real or perceived, that will experience a strong recovery in demand while trading at attractive valuations. Multifamily, suburban office and hotels are included in this category.

The third offers good fundamentals, where valuations are less attractive on a relative basis and a premium is being paid for growth expectations. Data centres are included in this category.

“Data centre REITs have sort of been the technology plays within real estate,” said Russo. “They’re starting to get to some lofty levels.”

The fourth category offers cheap valuation, but are cheap for a reason, where included asset classes are expected to continue to face challenges and lingering long-term effects from the pandemic. Fashion-oriented regional malls with department store anchors and high-rise office towers in gateway cities are included in this category.

Real estate investment suggestions for 2021

The Hazelview report makes these real estate investment suggestions for 2021:

– North American cell towers benefiting from tailwinds driven by 5G technology;

– self-storage properties experiencing a rebound in street rents and rising occupancy rates;

– industrial properties benefiting from robust e-commerce growth and supply chain optimization;

– hotels being poised to benefit from a global vaccine-driven recovery and pent-up travel demand;

– multifamily communities in Canada trading at significant discounts to intrinsic value;

– open-air, necessity-based retail centres serving as quasi last-mile distribution points;

– office REITs trading at deep discounts to private market values;

– healthcare REITs owning seniors housing facilities that will benefit from an occupancy recovery;

– and specialty property types such as casinos, life sciences and cold-storage facilities.

Hazelview’s 2021 Canadian investment outlook is positive for industrial, residential and specialty; neutral for self-storage, hotels and healthcare; and negative for retail and office.

Canadian industrial outlook

Some Canadian industrial REITs are trading at cheaper valuations than those in the U.S. and other countries.

“I don’t think industrial REITs have been appreciated as much as they have been in the U.S. and other markets, where those stocks have traded at a significant premium,” said Russo.

Industrial inventory replenishment should provide a further boost to an already strong fundamental market. Hazelview has observed higher rates of leasing activity and lease proposals, which it believes will foreshadow another year of market rent growth.

Higher cash flows should lead to a rise in property values and large amounts of private capital are expected to seek logistics assets. Russo expects some new development and plenty of transactions for the industrial asset class this year.

“Every real estate investor on the planet probably has industrial on the docket for purchase in 2021,” he said.

Canadian multifamily outlook

Hazelview believes there’s a disconnect between public and private market valuations in the multifamily asset class and thinks it’s poised to deliver attractive shareholder returns in 2021.

This will be led by rising household formation, the unaffordability of home ownership and favourable immigration policies.

“Multifamily is an area that could be quite attractive,” said Russo. “Multifamily rent collections have been strong throughout the year, yet the stocks were quite significantly hampered. Certainly since the vaccines they’ve caught up, but they’re still about 15 per cent from their pre-COVID levels.”

Russo expects plenty of multifamily transactions this year.

Canadian retail outlook

The retail sector was hit hard by government-imposed lockdowns. Most retail REITs suffered share price declines of 20 to 50 per cent.

Fundamentals for regional malls were challenged before the pandemic and that will continue, Russo said, calling them a “dying breed.”

“Even some of the survivors will have to reinvent themselves, and that means a lot of cap ex to restructure.”

Russo doesn’t think there will be many regional mall transactions this year because of large bid-ask spreads and a lack of interested buyers.

Some retail locations that may no longer be financially viable could be attractive for multifamily and other densification.

Open-air, necessity-based retailers in neighbourhood shopping centres — including grocery stores, pharmacies, bank branches and national brands catering to mass-market consumers — have experienced rising traffic and sales during the pandemic. This type of retail should continue to thrive in 2021.

Canadian office outlook

The pandemic led to an unprecedented increase in working from home. Although this shift was initially expected to be short-lived, it has continued into 2021. Russo believes people will need more widespread COVID-19 immunity and confidence in using public transit and elevators before office towers fully recover.

“While people are negative toward the asset class, some may take a contrarian approach,” said Russo. “I don’t think we saw so much of that in 2020 — at least not in North America, though you did see some of it in Europe and Asia.

“But I think you could see some of that in North America once we get through the winter season and the (COVID-19) numbers come down and people start going outside again and the vaccines start to take hold.”

Tenant demand for life sciences laboratory and office space is strong, particularly in international markets like Toronto that are near major research institutions, funding and university talent pools. The only new office space Russo expects to see developed this year will be in the life sciences space.

“There’s a massive demand for pharmaceutical laboratories and R and D,” he said. “We need more protection from future threats like COVID-19 and we need to plow more money into healthcare.”