These fund managers target the real driver of real estate success

If interest rates are going up because there is a credit crisis, that’s bad news for real estate. If rates are rising because of inflation, that’s generally a good thing for real estate because it’s a hard asset. And if interest rates climb because the economy is strengthening, and that results in job growth, once again, real estate should benefit.

“We have an improving outlook for the U.S. economy and president-elect Trump is completely focused on jobs, so people are speculating employment growth is going to continue to be strong in the U.S.,” said Jeff Olin, chief executive at Vision Capital Corp. “It may be that his policies are going to be inflationary, but ironically, these are very positive things for real estate.”

Olin, and co-managers of the Vision Opportunity Fund, Frank Mayer and Andrew Moffs, aren’t concerned about the direction of interest rates or cap rates, because over the long term, they’re confident supply and demand trumps those factors.

“The number one factor impacting real estate is not the old adage: location, location, location. It’s not interest rates. It’s supply and demand,” Olin said. ” And the number one factor impacting the demand side for real estate is jobs. If you have a job, you can buy a house, rent an apartment, and you may work in an office or industrial building, and have money to buy things in a retail centre.”

While there has certainty been a short-term negative impact on the REIT space – triggered by rising rates following Donald Trump’s victory in the U.S. presidential election – the managers think this has created a compelling buying opportunity in selective areas.

They highlighted data showing that in the 16 instances since 1995 when rates were rising, REITs generated positive returns in 12 of those periods.

Vision is particularly constructive on two sectors, the first being the industrial logistics real estate space.

“We’re seeing very strong fundamentals for industrial real estate, primarily driven by e-commerce activity,” Olin said, noting that the amount of industrial logistics space needed to service an e-commerce retailer is three times that required for a traditional retailer.

That’s because e-commerce companies have to pick and chose parcels, not just pallets, and their warehouses must be able to handle returns, as opposed to that being done in-store.

“In all of the real estate asset classes, I think e-commerce is the big disruptor,” Moffs said, highlighting fund holding Prologis Inc. (PLD/NYSE).

It’s the largest industrial logistics company in the world, with a concentration in prime U.S. coastal markets that benefit from Asian and European trade.

“They don’t need any rent growth in their portfolio to achieve at least a three to four per cent same-store growth profile over the next five years, because there is so much demand,” Moff said.

“For a platform like this, the market is giving very little value to their development business, but they are an asset manager on par with Brookfield,” he added.

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Pure Industrial REIT (AAR.UN/TSX-V) is a Canadian-focused name in the same sector that the managers believe is positioned in the right markets.

“British Columbia is on fire and has been for years in industrial, because of the very constrained nature of land there,” Olin said.

He highlighted the company’s development in the Vancouver area, several deals with FedEx, a very strong management team, and its six per cent dividend yield.

The other market segment Vision is bullish on is multi-family and apartment REITs, partly because there are 66 million Americans between the age of 18 and 34.

That’s a bigger population cohort than the Baby Boomers, many of whom are also entering this real estate segment as they look to downsize their homes.

Olin highlighted Pure Multi-Family REIT LP (RUF.U/TSX-V), which has all of its properties in the U.S., with a big concentration in Dallas, Texas.

“They had more job growth in the city of Dallas last year than in the country of Canada,” he said, noting that Toyota, FedEx and Liberty Mutual are building huge head offices near Pure’s properties.

Olin also noted that there is no material impact from the oil price downturn in Dallas, unlike Houston.

“It’s cheaper than the U.S. REITs that trade in the same space,” Mayer said, noting that the age of Pure’s portfolio is the lowest in the group at just 12 years. “The older the building, the more money you need to spend to keep it fresh.”

Another holding, Interrent REIT (IIP.UN/TSX) is focused on central Canada, primarily the Toronto area, Montreal and Ottawa-Hull areas.

“It is a growth REIT, and the management has been very astute at acquiring properties, fixing them up, improving the physical appearance and the economic functionality of the property, thereby generating superior rental increases,” Mayer said. “They create value, and so doing, the shareholders in this company have done extremely well.”