Investors and financial advisors routinely laud real estate as one of the best places to invest your money. Most people are familiar with real estate: they may own a home and possibly rent out a spare bedroom or basement suite. Or, they may own an investment property that’s used for rental purposes.
However, not everyone has the means to own and operate a property to generate rental income and realize gains from price appreciation. Some may also prefer not to become landlords when investing in real estate. In this case, an alternative way to participate in the real estate market is available by purchasing Real Estate Investment Trusts (REITs).
Read on to find out more about how to invest in REITs in Canada.
Key Points
| REITs Stands For | Real Estate Investment Trusts |
| Purpose of REITs | REITs offer real estate investors a way to invest in property without having to purchase real estate or become a landlord. |
| Where to buy REITs | Most REITs can be purchased and sold on major stock exchanges, much like traditional stocks. |
| Types Of REITS | Several REITs are available for investment, including mortgage REITs, residential REITs, industrial REITs, office REITs, and retail REITs, among others. |
What Is A Real Estate Investment Trust?
A REIT is a company that operates in the real estate industry. REITs own, manage, or finance real estate to generate income. They pool capital together from investors and provide returns in the form of dividends and capital appreciation.
While some operate as private investment vehicles, most REITs are publicly traded like stocks. As an investment opportunity, REITs provide investors with access to the real estate market without directly purchasing or managing a property. You can invest in REITs through a mutual fund or by purchasing them directly on an exchange through a brokerage firm.
How To Buy And Sell REITs In Canada
There are a handful of ways to invest in REITs, including the following:
Publicly Traded REITs
Publicly traded REITs are traded on major stock exchanges, like stocks. You can buy and sell these REITs much like you would stocks, which makes them a highly liquid type of investment. You can buy publicly traded REIT stocks, mutual funds, and ETFs from an investment broker.
Public Non-listed REITs
Unlike publicly-traded REITs, public non-listed REITs are not listed on the stock market. Non-listed REITs are not as liquid as publicly-traded REITs, so they’re more difficult to buy and sell. Further, non-listed REITs are more expensive to trade.
Private REITs
Private REITs are listed on stock exchanges and are typically only available for purchase through institutional investors. Moreover, private REITs are usually only valued once a year, unlike public REITs that undergo valuation more frequently. Only certain brokers or financial institutions sell private REITs.
Types Of REITs You Can Buy In Canada
REITs tend to specialize in a certain sector of properties. Below are some of the most common types of REITs you can invest in.
Residential REITs
Residential REITs invest in rental apartments and manufactured housing. To maximize income and generate stable cash flow from rent payments, they tend to purchase properties in urban areas, where demand for rental units is high.
The performance of residential REITs depends on factors such as home affordability and the cost of single-family homes. If home prices decrease and mortgage rates drop, homeownership will become more appealing to people, so the demand for rental properties will decline. Conversely, if the cost of owning a home rises, people will be more inclined to rent.
For this reason, you should assess the state of the market before investing in residential REITs to determine whether people are more likely to rent or buy a home. You should also examine employment statistics, population growth, and vacancy rates. An economy with low unemployment, an increasing population, and falling vacancy rates is ideal for residential REITs.
Retail REITs
These REITs invest primarily in shopping malls and freestanding retail stores. Much like residential REITs, they generate income from rent charged to tenants. Hence, investments in retailers with reliable cash flow and locations that attract plenty of shoppers are crucial.
The state of the overall economy greatly impacts retail REITs. In a healthy economy, jobs are plentiful, so people are more apt to visit retail stores and spend money. In contrast, people are less eager to shop in a contracting economy and opt to save their cash.
The best performing retail REITs invest in properties with strong anchor tenants, such as grocery stores, where demand is consistently high. They also find innovative ways to fill vacant locations that they own, such as converting retail space into an office.
Mortgage REITs
Mortgage REITs are unique in that they don’t directly own any tangible real estate. Instead, they issue mortgages to real estate owners or purchase mortgage-backed securities. They generate income through the interest they earn on their investments in mortgages and mortgage-related assets.
The model that mortgages REITs utilize makes them susceptible to interest rate increases. Should interest rates rise, the value of their holdings would decrease. This would, in turn, depress their stock price, as well as increase their cost to raise capital. However, a period of falling interest rates would have the opposite effect and result in gains in their mortgage portfolio.
Healthcare REITs
Healthcare REITs invest in real estate that operates in the healthcare field, such as hospitals, medical centres, and retirement homes. These REITs are one of the safest to invest in, as demand for medical services typically stays high, irrespective of what’s happening in the broader economy.
Healthcare REITs’ performance is tied to the healthcare system, so an increase in the demand for health-related services will translate to higher returns. The ideal healthcare REIT should be well-diversified and have steady income streams, including facilities that care for an increasingly aging population.
Office REITs
These REITs make investments in office buildings and generate rental income from tenants. As a result, they seek to purchase property in locations where demand is high and likely to grow in the future.
The state of the economy and the unemployment rate impact the performance of office REITs. When businesses expand their operations, they hire more people and require new office space. This presents opportunities for office REITs to acquire property that can be readily leased. During an economic contraction, however, these REITs don’t fare well – they may lose considerable income if their vacancy rates climb.
Good quality office REITs own properties in large economic centres, have plenty of capital for acquisitions, and can pivot by finding unique ways to earn income from unused space they own.
Industrial REITs
Industrial REITs invest in properties used for industrial purposes, such as warehouses, distribution centers, self-storage facilities, and data centers. They may also include investments in cell towers and light manufacturing buildings. The appeal of industrial REITs lies in their potential to benefit from trends in e-commerce, global trade, and technology infrastructure expansion.
The performance of industrial REITs is closely tied to business activity and the health of the broader economy. An increase in online shopping, for example, directly boosts demand for warehouse and distribution spaces. Similarly, the growth in data consumption and cloud services enhances the need for data centers and related infrastructure.
When considering an investment in industrial REITs, it’s important to evaluate factors such as the growth of e-commerce, the expansion of technology companies, and global supply chain dynamics. Additionally, look at the geographical locations of the properties, as those situated in key logistic hubs or near major urban centers are likely to see higher demand.
Best REITs In Canada
Some of the best REITs in Canada include the following:
| Dividend Yield | Annual Dividend | Market Cap | |
| Canadian Apartments REIT (TSE:CAR.UN) | 3.18% | $1.45/share | $7.89 billion |
| CT REIT (TSE:CRT.UN) | 5.99% | $0.92/share | $3.577 billion |
| RioCan Real Estate Investment Trust (REI-UN.TO) | 5.66% | $1.09/share | $5.75 billion |
| Granite REIT (TSX:GRT.UN) | 4.24% | $3.26/share | $4.83 billion |
| Primaris REIT (TSX:PMZ.UN) | 5.61% | $0.84/share | $1.554 billion |
Canadian Apartments REIT (TSE:CAR.UN)
The Canadian Apartments REIT is the largest in Canada and currently operates more than 67,000 properties and sites in Canada, Ireland, and the Netherlands.
- Dividend Yield: 3.18%
- Annual Dividend: $1.45/share
- Market Cap: $7.89 billion
CT REIT (TSE:CRT.UN)
The CT REIT generates most of its revenue from leasing properties to the Canadian Tire Corporation. Its portfolio is made up mainly of properties occupied by Canadian Tire retail stores, with others including distribution centers and mixed-use commercial operations.
- Dividend Yield: 5.99%
- Annual Dividend: $0.92/share
- Market Cap: $3.577 billion
RioCan Real Estate Investment Trust (REI-UN.TO)
The RioCan REIT is the second-largest REIT in Canada, with nearly 200 properties in operation across the country. Its properties are mostly retail stores, with an increasing number of mixed-use properties.
- Dividend Yield: 5.79%
- Annual Dividend: $1.09/share
- Market Cap: $5.75 billion
Granite REIT (TSX:GRT.UN)
The Granite REIT is mainly comprised of properties that operate within the industrial, logistics, and warehouse industries in North America and Europe.
- Dividend Yield: 4.24%
- Annual Dividend: $3.26/share
- Market Cap: $4.83 billion
Primaris REIT (TSX:PMZ.UN)
The Primaris REIT is focused on enclosed shopping centres located in expanding mid-sized markets in Canada.
- Dividend Yield: 5.33%
- Annual Dividend: $0.83/share
- Market Cap: $1.54 billion
What To Look For In A REIT
Before choosing a REIT to add to your investment portfolio, consider the following factors:
Occupancy Rate
A REIT with a higher occupancy rate means that a larger share of the complex is occupied, and a smaller share is vacant. This is a positive aspect in terms of cash flow.
Debt-To-Equity Ratio
REITs often depend on financing, which can affect investor returns. A debt-to-equity ratio is a measurement of the amount of debt a company holds relative to the equity it generates from shareholders. Companies with a lower debt-to-equity ratio may be at a lesser financial risk than those with a high ratio. Consider buying a REIT with a lower debt-to-equity ratio to minimize your investment risk.
Dividend Yield
A REIT’s dividend yield will give you an idea of how much income you can earn from dividends compared to the investment cost. Ideally, you want a relatively high dividend yield. That said, be wary of very high dividend yields, as they may be unsustainable long term.
Management Team
The history and level of experience of the REIT management team will have a big impact on the REIT’s performance. Ideally, the REIT’s management team should have a proven track record of successful investments that make money for its investors.
Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO)
FFO provides a clearer picture of a REIT’s operating performance by excluding the effects of depreciation and gains or losses from property sales, which can distort net income figures. It is calculated by adding depreciation and amortization to earnings, excluding gains on sales of real estate.
Adjusted Funds From Operations (AFFO) goes a step further by also accounting for capital expenditures and leasing costs necessary to maintain the quality and earning power of the REIT’s properties. AFFO is often considered a more accurate measure of a REIT’s ongoing cash flow and its ability to sustain and grow dividends.
Both metrics are key indicators of a REIT’s financial health and its potential for long-term income generation. Investors should look for REITs with stable or increasing FFO and AFFO per share, as these suggest effective management and a strong potential for sustained dividend payments.
What Qualifications Must Be Met To Be Considered A REIT?
There are specific requirements that companies must meet to qualify as a REIT:
- At least 75% of the company’s assets must be involved in real estate investment.
- The company must earn a minimum of 75% of its gross income from rent, property sales, mortgage interest, or capital gains on sold properties.
- The company must distribute at least 90% of its yearly taxable income to shareholders through dividend payouts.
Are REITS A Good Investment During A Recession?
Recessions are aided by falling interest rates. This may help cut costs incurred by REITs and boost profits. That said, the profitability of a REIT depends on the type of REIT and the sector it’s in.
For instance, REITs that are heavily invested in retail may be more negatively affected by a recession compared to those mainly invested in rental properties or healthcare facilities.
Pros And Cons Of Investing In REITs Vs Rental Income
Before you decide whether to put some of your money into REITs, you should ensure you’re aware of the pros and cons of this type of investment.
Pros
Investing in REITs offers several advantages:
- Higher Liquidity. REITs trade on an exchange like stocks, making them easy to sell and quickly convert to cash.
- Higher Dividend Yields. REITs can have high dividend yields and can provide a better return than bonds because they can generate consistent cash flow.
- Invest In Commercial Real Estate. REITs offer a great way to gain exposure to commercial real estate, which is usually out of reach for investors with less capital to invest.
- Portfolio Diversification. Proper diversification is crucial for the long-term performance of your investment portfolio. Investing in real estate through REITs is a great way to expose your portfolio to different asset classes. Real estate retains value more effectively than stocks, especially during market downturns, and offers a more robust income stream.
- No Property Management Duties. With a REIT, you can invest in real estate without managing a property or dealing with tenants.
Cons
Along with the perks of REITs come a handful of drawbacks to consider:
- Slow Growth. Expect to wait a while to generate a significant return on your REIT. Values of REITs are subject to interest rate fluctuations and the health of the economy. They provide little capital appreciation during periods of tepid economic growth and may lose considerable value during recessions. REITs function best as long-term investments.
- Property Risks. REITs are subject to similar risks that traditional real estate investing is exposed to. For instance, changes in property values, vacancy rates, local rent prices, and demand for rental units all impact the value of REITs.
- Market Risks. The performance of REITs depends heavily on the state of the sector they invest in. Adverse trends in the sector can shrink a REIT’s income streams and severely impair its value. Since REITs trade on stock exchanges, they’re subject to price fluctuations like other stocks.
Bottom Line
Buying a REIT can be a great way to invest in the real estate market without buying a property or taking on landlord duties. REITs offer exposure to the real estate market while providing a steady stream of income. Plus, REITs are professionally hand-picked and managed, and can hedge against inflation. Like any other investment type, always do your homework before investing in REITs.
