Talk about the impact of change in interest rates as it relates to Canadian real estate stocks! As interest rates have risen since 2022, generally, real estate stocks have fallen. The reason is that higher interest rates lead to higher interest expense for new or refinanced debt. Asset values and stocks typically fall as a result.

Specifically, since 2022, the Bank of Canada has increased the benchmark interest rate from 0.25% to 5%. Let’s see how higher interest rates have affected these TSX real estate stocks, which are some of the best stocks to consider right now.

CAPREIT

Canadian residential real estate investment trust (REIT) Canadian Apartment Properties REIT (TSX:CAR.UN), or CAPREIT stock, has fallen close to 25% from its high in early 2022.

Last year, its interest expense was more than $42 million (or almost 26%) higher than in 2020. From 2020 to 2023, CAPREIT’s long-term debt increased by $1.5 billion or 30%. Its debt-to-asset and debt-to-equity ratios went from 40% and 67%, respectively, to 45% and 83%. The Canadian REIT increased its assets and essentially kept its stockholders’ equity flat but its debt levels increased at a higher pace.

At a high level, CAPREIT’s balance sheet remains manageable. Its long-term debt-to-capital ratio is about 39%. Furthermore, it has been able to increase its funds from operations (FFO) persistently over time on a per-unit basis. Over the past 10 years, it increased its FFO per unit by just north of 3.5% per year.

CAPREIT is the largest multi-family residential landlord in Canada and is a blue chip stock in the Canadian residential REIT space. The weakness in the stock brings it back to its long-term normal valuation. At about $43 per unit, the Canadian REIT trades at a decent discount of almost 25% from the analyst consensus price target of $57.22, as shown on Yahoo Finance. At this price, it also provides a cash distribution yield of 3.3%.

FirstService

Another real estate stock that could be a great buy now is FirstService (TSX:FSV). Although its dividend yield is small at about 0.65% at about $209 per share, it has delivered double-digit dividend growth over the long term. Specifically, in the last 10 years, its dividend growth rate was 21.9%, while its three- and five-year dividend growth rates are 10.9% and 10.8%, respectively.

FirstService offers real estate services in North America, including managing residential communities. Furthermore, it provides essential property services through individually branded franchise systems and company-owned operations. Over the last few years, it achieved returns on equity of at least 10%.

Its interest expense almost doubled in 2023 to over $47 million versus in 2020. Its debt-to-asset and debt-to-equity ratios went from 61% and two times, respectively, to 63% and 2.2 times.

The stock pulled back about 16% from early 2022. So, it could be a good opportunity to buy on weakness. According to the analyst consensus price target, FSV could appreciate close to 17% over the next 12 months.

Both stocks are defensive names in the TSX real estate sector and are worth investors’ consideration, especially on more meaningful dips.