Canadian REITs are a good option for those wanting real estate representation in their portfolio
If you want to add to your real estate holdings, one good way to do it is through Canadian REITs.
Investing in Canadian REITs lets you hold income-producing real estate such as office buildings, shopping malls and hotels. They can save you the cost, work and risk of owning investment property yourself.
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More about Canadian REITs, and special tax treatments
The best real estate investment trusts have good management and balance sheets strong enough to weather an economic downturn. They also have high-quality tenants, and they carefully match their debt obligations with income from their leases. The best ones are still doing well, despite slow economic growth, and have taken advantage of low interest rates to refinance long-term mortgages.
Canada offers special tax treatment for Canadian income trusts. When they flow their income through to their unitholders, they don’t pay much if any corporate tax. Investors pay tax on most of the distributions as ordinary income (although some distributions qualify as a tax-deferred return of capital).
Ottawa feels the income-trust business structure is appropriate for real estate investment trusts, or REITs, so it exempted REITs from the 2011 income-trust tax.
Real estate investment trusts resemble Canadian income trusts, but with a key difference: REITs invest in income-producing real estate, such as office buildings, shopping centres and hotels.
Real estate investment trusts can maintain their exemption as long as they meet the following requirements:
- REITs must not hold any property other than “qualified REIT properties” at any time during a tax year.
- At least 75% of the trust’s revenue for a tax year must come from rent or mortgage interest from real or immovable properties in Canada, and capital gains from the sale of such properties.
- At least 75% of the total fair market value of all trust properties that the REIT holds must be in Canada.
A few Canadian REITs:
- H&R REIT (Toronto symbol HR.UN) owns or has stakes in office buildings, industrial properties and shopping malls in Canada and the U.S. The trust uses proceeds from industrial properties to buy more malls and office buildings in Canada.
- RioCan Real Estate Investment Trust (Toronto symbol REI.UN) owns all or part of many shopping centres in Canada and, increasingly, mixed-used properties.
- Allied Properties Real Estate Investment Trust (Toronto symbol AP.UN) owns office buildings, mostly in major Canadian cities. These mainly Class I properties contain over 10 million square feet of leasable area.
Canadian REITs—much better than speculative stocks
One of the more reassuring aspects of the long-term rise now underway in the stock market is that the strength is concentrated in well-established companies. Investors are bidding up the prices of stocks with a history of sales and earnings, if not dividends.
This contrasts sharply with, say, the income-trust boom of the mid-2000s. Back then, investors were plunging into new issue income trusts, many of which were of low investment quality. Today’s situation contrasts even more with the Internet stock mania of the late 1990s. Many of the new issue Internet stocks back then were little more than stock promotions.
Chasing after low-quality investments like these becomes common when inexperienced investors enter the market. These newcomers lack the healthy sense of skepticism that you need to succeed as an investor. So they naturally zero in on the least desirable stocks on the market. Almost by definition, these are extremely risky and/or overpriced stocks that seem to offer high rewards with little risk. They generally deliver precisely the opposite.
Do you hold any Canadian REITs in your portfolio? Share your experience with them in our comments section.
This post was originally published in 2016 and is regularly updated.