As the COVID-19 Closure Continues, the Economy is grinding at standstilland the situation looks grim for all Canadian investors. The real estate sector, in particular, is entering a deep freeze due to the persistent closure. Large numbers of Canadians are currently unemployed due to the closure of non-core businesses.
Small businesses are on the verge of collapse and the debt crisis is getting worse as mortgages tighten. Add a drop in oil prices to the mix and we have the perfect recipe for a monumental collapse of the real estate market.
If you have vested interests in real estate investment trusts (REITs), you may be wondering what you should do about the situation.
The possibility of a housing market collapse
A drastic drop in average income and a decline in credit could be the catalysts that can lead to the collapse of the Canadian real estate market. The current closure is costing millions of Canadians jobs. I don’t think it’s unfair to say that the average ability of a Canadian to buy real estate has been decimated.
Banks will ultimately have no choice but to tighten lending rules, which could further decrease purchasing power. Soaring unemployment and loan restrictions could drive homeowners to sell properties at reduced prices. At times like this, bad REITs could sink your hard-earned capital.
REITs to survive the accident
REITs generally react to market movements in general. In such an environment, REITs are subject to volatility. Distributions by REITs may, however, be more durable than dividend-paying stocks with artificially high yields due to the market correction.
RioCan REIT (TSX: REI.UN) and REIT SmartCentres (TSX: SRU.UN) are two REITs in which you could consider parking your capital to weather the storm.
Both stocks are currently in oversold territory. The REITs plunged with the rest of the market as the pandemic-fueled market debacle began.
RioCan REIT is trading at $ 15.37 per share at the time of writing and offers investors a dividend yield of 9.37%. It is certainly shocking that a stock of such quality is down more than 40% from its peak in February 2020, but the situation demands it.
The REIT has an oversized return since its distributions generally remain around the 5% mark. The stock was also beaten in the last recession, but has proven to be a reliable source of passive income for its shareholders.
RioCan is a diversified REIT known for its reliable cash distributions to shareholders. It is a reliable title that you can trust to offer you security against a market crisis. However, no one can guarantee isolation, as we saw during the 2008 recession.
Although RioCan has suffered from the current crash, I believe its actions will recover over time. You can invest in its stocks to get a high dividend yield while the market is repairing.
A surprise for me during this stock market crash was SmartCentres REIT. He imploded in the beginning of the decline in the market powered by coronaviruses. At the time of writing, it is trading at $ 19.56 per share and offers shareholders a dividend yield of 9.46%, as it is down almost 40% from its peak in January 2020.
As a precaution against the pandemic, people should avoid large gatherings. Shopping malls are the last place people want to hang out. Most shopping centers have reduced opening hours while they are taking steps to prevent the spread of COVID-19.
SmartCentres’ portfolio is mainly made up of shopping centers and is suffering from a drop in traffic due to the pandemic. While this may be alarming, the decline could be temporary and will not cause a significant vacancy in its properties.
SmartCentres tenants bear most of the damage. As long as they can pay their rents, SmartCentres can continue to pay their shareholders.
In times of housing market crash, it is better to avoid acquiring assets highly exposed to the residential real estate sector. You need to consider REITs that can pay distributions with relatively lower risk than residential REITs.
RioCan and SmartCentres are two REITs better positioned to weather the downturn than most others in the real estate industry.
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The crazy contributor Adam Othman has no position in any of the titles mentioned. Motley Fool recommends Smart REIT.