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How Higher Interest Rates Are Affecting Canadians (and How to Invest Accordingly)

Since 2022, the Bank of Canada has increased the policy interest rate by 4.50-4.75%. Higher interest rates have made Canadians with variable interest rate debt experience a climb in interest expense over time.

Interestingly, Canadians are keeping up with their mortgage payments. A Ratehub article titled “Can your mortgage lender force you to sell your home through power of sale?” that was published on June 15 noted that “according to data from Equifax, 0.15% of mortgages are overdue by 90 days or more compared with 0.21% at the same time in 2021.”

Canadians may be prioritizing their mortgage payments over other loans, as no one wants to lose their home that they’ve worked so hard to get (and began building equity in). The article also wrote, “Other professional worriers are looking at the number of non-mortgage loans that are behind on payments. Excluding mortgages, 1.10% of Canadian loans are at least 90 days past due, an increase of more than 25% since this time last year.”

The capital tightening makes it harder for anyone to qualify for financing. For example, the article stated, “Rising interest rates have pushed home values down, made it harder to qualify for financing, and extended the time it takes to sell a home. Where overextended homeowners could quickly sell for a profit in previous years, that’s not always the case anymore.”

Get more monthly income from quality Canadian REITs

Higher interest rates have also weighed on stock valuations, including Canadian real estate investment trusts (REITs). Here are a couple of the top Canadian REITs Canadian investors can consider on the pullback for more monthly income. Compound interest could be more effective when you’re able to reinvest your cash distributions sooner.

Choice Properties REIT

Choice Properties REIT (TSX:CHP.UN) is a defensive REIT with a focus on grocery-anchored retail real estate properties that guarantee regular foot traffic. Specifically, across its 703 properties, about 82% is necessity-based retail properties. Based on net operating income, the portfolio has about 80% in this kind of defensive retail properties, 15% in industrial properties, and 5% in mixed-use and residential properties.

Its largest tenant is Loblaw, which contributed 57% of its gross rental revenue in the first quarter (Q1). Not surprisingly, its Q1 occupancy remained high at approximately 97.7%. Year over year, it also witnessed its same-asset net operating income rising 4.6%. The REIT currently has an investment-grade DBRS credit rating of BBB.

The stock is down about 16% from its 52-week high. At $13.17 per unit, the stock offers a cash-distribution yield of about 5.7%. The analyst consensus 12-month price target represents a discount of 17% or near-term upside potential of just north of 20%. If the REIT sector continues to be pressured, the stock could dip to roughly $12.50.

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Granite REIT

If you want greater exposure to the higher-growth market of industrial properties, you can explore Granite REIT (TSX:GRT.UN) on this pullback. The demand for industrial properties continues to be strong, as suggested by Granite REIT’s recent high occupancy of about 99.6%.

Its portfolio is diversified across 128 income-producing properties and 12 development properties or land. Additionally, it has a track record of increasing its cash distribution by 12 consecutive years with a 10-year cash-distribution growth rate of 4.5%.

The stock is 17% lower from its 52-week high. At $73.43 per unit, the industrial REIT offers a cash distribution yield of almost 4.4%. The analyst consensus price target implies a discount of 25% or near-term upside potential of 33%.

Investor takeaway

On the pullback from higher interest rates, investors should consider capturing shares from quality REITs opportunistically on pullbacks for greater monthly income.

The post How Higher Interest Rates Are Affecting Canadians (and How to Invest Accordingly) appeared first on The Motley Fool Canada.

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More reading

2 Canadian Real Estate Stocks for Stability and Growth Potential
4 Safe Dividend Stocks With Yields Over 4%
These Canadian REITs Provide Attractive Dividend Yields
These Canadian REITs Could Help You Generate Passive Income
The Top Canadian REITs to Buy in June 2023

Fool contributor Kay Ng has no position in any of the stocks mentioned. The Motley Fool recommends Granite Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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