Canadian real-estate investment trusts are at a rare point when they can outgun both U.S. rivals and pension funds for deals, so expect to see some buying.
That's the thesis put forward by Macquarie's well-respected REIT analyst Michael Smith.
The equation works out like this, according to Mr. Smith: "All-time low commercial mortgage rates + Stricter lender underwriting = a huge advantage to Canadian REITs."
Mr. Smith argues that Canadian REITs should be able to borrow on better terms than U.S. real estate companies, because lenders are being pickier and Canada's recourse terms are more lender-friendly.
And because absolute rates are so low, the advantage in an auction goes to the player willing to use leverage, which favours REITs over the other big buyers of real estate, pension funds.
"Pension funds tend to use minimal or no leverage so do not benefit in the same way and, for the most part, are focused on expanding outside of Canada," Mr. Smith argues.
Just how low are borrowing costs? TD Securities analyst Sam Damiani estimates that they are in the 4.6 per cent to 4.8 per cent range for a 10 year mortgage for REIT borrowers.
They are likely even lower for the top tier of buyers such as RioCan REIT which just bought two shopping centres, and probably got favourable rates "based on the quality of its assets, portfolio of unencumbered assets and management expertise among others."