Canadian real estate investment trusts or REITs provide investors with exposure to the country’s real estate market. By investing in REITs, you can enter the real estate market without having to get directly involved in property ownership.
While buying a house requires a massive amount of capital, you can start investing in REITs with as little as a few dollars. These instruments are traded like stocks on the TSX and help to diversify your portfolio and reduce overall risk.
Canadian REITs are attractive to the income investor as they have the ability to generate stable cash flows and pay regular dividend income. Further, there is always the possibility to benefit from long-term capital gains making REITs a top investment vehicle compared to bonds and stocks.
What is a REIT?
REITs are companies that own a portfolio of commercial, industrial, or residential real estate properties with the sole of generating income. Similar to a mutual fund, a REIT sources capital from a group of investors and pays them regular dividends.
These instruments are a solid way for investors to enter the real estate market. You do not have to take on a massive amount of debt and can avoid hidden costs associated with owning the property. REITs are highly liquid instruments that make buying and selling the instruments really easy.
There are several types of REITs that are traded on the Toronto Stock Exchange. Here we take a look at a few of them.
One of the most common types of REIT investments is in shopping malls or in the retail space. Most of the shopping centers you visit in Canada is likely to be owned by a REIT. If you are looking to invest in a retail-focused REIT, it makes sense to explore the macro-economic issues impacting this space.
Due to the COVID-19 pandemic, the retail sector has been severely hit. Further, there is a good chance that consumer shopping behavior will undergo a permanent change in the upcoming decade due to the shift towards e-commerce.
Retail REITs generate income from the rent charged to tenants and if retailers experience any liquidity issues or default on monthly payments, it will have a direct impact on the revenue of the REIT.
After analyzing the industry, you also need to evaluate the individual REIT where you are planning to invest. The ideal company should have a robust profit margin, a healthy balance sheet, lower debt, and enough liquid reserves to acquire additional properties.
Some of Canada’s top retail REITs are RioCan REIT (TSX:REI.UN), Smart REIT (TSX:SRU.UN), Plaza Retail REIT (TSX:PLZ.UN) and Canadian Tire REIT (TSX:CRT.UN).
REITs part of the residential space own and operate a portfolio of rental apartment properties as well as properties in the manufactured housing space. You need to consider a variety of factors while investing in residential REITs that include home affordability and the cost of single homes.
For example, the cost of a house is really expensive in large Canadian cities of Vancouver and Toronto, which means individuals and families are likely to rent a place which increases the price landlords can charge every month. Most residential REITs look to acquire properties in large urban areas due to stable demand.
Investors also need to look at the potential for growth in terms of employment and population- two key drivers for residential properties. Residential REITs with a low vacancy rate and a rising rent revenue is an ideal investment.
Top Canadian residential REITs include Killam Apartment (TSX:KMP.UN), Northview Apartment (TSX:NVU-UN.TO), and Morguard North American Residential (TSX:MRG.UN).
These REITs are some of the safest investments on the market as healthcare is a recession-proof industry. A healthcare REIT might invest in real estate such as retirement homes, hospitals, medical centers, assisted living, or even nursing facilities.
Similar to other REITs, even healthcare-focused REITs depend on a steady stream of occupancy fees for revenue. Two of the to top healthcare REITs in Canada is Northwest Healthcare Properties (TSX:NWH.UN) and Chartwell Retirement Residences REIT (TSX: CSH.UN)
As the name suggests, these REITs invest in office buildings and receive rental income from tenants who have a long-term lease agreement. In order to invest in office REITs, you need to look at the state of the economic cycle, vacancy rates, and unemployment rates.
This is another real estate sector that has been hurt amid the ongoing pandemic and it's advisable to invest in REITs that have buildings in large economic centers.
Also known as logistics REITs, industrial REITs own factories, warehouses as well as distribution centers. For example, large e-commerce companies such as Amazon (NASDAQ:AMZN) and Shopify (TSX:SHOP)(NYSE:SHOP) have several fulfillment centers that might be funded by industrial REITs.
The Bullish bottom-line
Similar to all other investments, REITs also carry a fair amount of risk. However, as seen earlier unitholders do not have the responsibility of looking for tenants or the management of properties. Investors need to always be on the lookout for REITs across industries that are a good bet and in line with their risk tolerance.