(Bloomberg) -- Battered Canadian real estate stocks may fall even further if interest rates continue to climb, but the sector is posting strong earnings and trades at a large discount to net asset value, according to RBC Global Asset Management Inc.

The S&P/TSX Real Estate Sector Index has plunged 30% this year, making it one of Canada’s worst-performing groups and putting it on pace for its biggest annual drop since 2008. 

“When you look at how that underperformance came about, 90% of that came from contraction in the multiple” instead of profit declines, RBC Senior Portfolio Manager Irene Fernando said in an interview. 

The sector is dominated by real estate investment trusts, which pay out most of their funds from operations and are sensitive to interest rates. As central banks have raised the cost of borrowing, Canadian property stocks have fallen to the lowest level since November 2020. 

The sector will stabilize once it becomes clear what the terminal rate is for central banks, Fernando said -- how far they’ll go in lifting rates before they stop. “Then we can totally recalibrate and move on from there.” 

Twenty-one of the 22 stocks in the TSX real estate index have been money-losers this year. The only exception is shopping mall owner Primaris REIT, which is up less than 1% this year as of Friday morning at 10:36 a.m. in Toronto. Some of Canada’s largest real estate trusts are among the biggest laggards, with Allied Properties REIT and Granite REIT each more than 37%.

Still, residential and industrial REITs are seeing good demand and should be able to raise prices, Fernando said. And the broader sector looks unusually cheap -- even if some downside remains, she said. 

“It’s hard to say how much more downside, but it’s almost a 20% discount to NAV today. We don’t see those opportunities quite often,” Fernando said. “That is a pretty meaningful discount to net asset values.”

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