Bullishness On Canadian Consumer Debt is Supporting Local Retailers
Record credit card debt issues this year have fared well for Canadian retail shops and their landlords. Increased liquidity and strong performance in the Canadian credit card market appear to be strong indicators of an equally robust and sustainable performance ahead amongst commercial real estate investments.
Data from Bloomberg and the Financial Post shows that Canadian banks have issued a record $6.8B in credit card debt securities in the U.S. this year. Per the Securities Industry and Financial Markets Association, 2015 saw around $24B of these types of bonds issued. However, these numbers have been as high as $117B per year, suggesting that there is plenty of room for new growth, with JP Morgan Chase expecting this market to grow by at least 30% in 2017.
What's happening is that the U.S. is buying up Canadian debt due to its profitability and high repayment rates. The statistics show that Canadians keep on using credit but are still better at paying it back than Americans.
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For Canadian retailers this news suggests more spending and revenue is on its way. The numbers show that in Canada, 98% of this is still happening in physical stores and not online. This bodes well for the immediate holiday season and for the next couple of years, as well.
More consumer spending means higher per store and per square foot sales, which is direct profit for retailers. The result of this is that retail property landlords may see rent bumps being activated, as well as more competition for floor space.
This is all happening in tandem with rising foreign investment from China, growing bullishness in the Canadian energy sector, and interest rates being at historic low levels. At the same time we are seeing general lending and liquidity increasing with global lenders and investors becoming more aggressive about putting billions in capital to work. This is providing more capital to invest in commercial real estate, which in turn may support higher asset prices.
New record setting statistics for credit card debt issuance and foreign investment, together with a brightening outlook for the global economy is likely to be great news for Canadian companies and Canadian store sales.
It is reasonable to expect this to quickly translate into more appetite for commercial real estate assets in Canadian, and specifically in the retail property sector. Strong consumer spending should provide a lift to yields and performance of current holdings, while adding value to new acquisitions over the months and possibly years to come.