Discover the characteristics of the best Canadian real estate investment trust (REIT) to buy, including an example of one we like, as well as one type of REIT to avoid.
A Canadian real estate investment trust invests in income-producing real estate such as office buildings, shopping malls and hotels. Notably, that’s a segment of the market that is difficult for most investors to access through the direct ownership of property.
Moreover, a REIT saves you the costs, work and risks of owning an investment property yourself.
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RioCan, symbol REI.UN on Toronto, is a Canadian real estate investment trust (REIT) worth buying
The REIT owns all or part of 207 shopping centres and other properties across Canada, as well as 13 projects under development for a total of 36.4 million square feet. Its overall occupancy rate is a high 96.8%.
RioCan announced a new strategy in October 2017 to boost investor value. The biggest part of that plan was for it to concentrate on six major urban markets: Toronto, Montreal, Ottawa, Calgary, Edmonton and Vancouver. As a result, the REIT sold most of its suburban malls and other properties in smaller cities.
The trust is also diversifying its holdings with mixed-use properties that contain retail, residential and office portions. It typically makes deals with other developers that let it focus on the retail and residential areas.
Under its new long-term strategy, RioCan plans to add properties totalling roughly 500,000 square feet to its portfolio annually over the next five years. Those new assets should also increase the trust’s cash flow per unit by 5% to 7% annually over those five years.
The improving cash flow should also give RioCan more room to raise your distributions.
Here’s what makes a good Canadian real estate investment trust (REIT) so you can make profitable decisions
The best Canadian real estate investment trust (REIT) will have good management and a balance sheet strong enough to weather an economic downturn. It will also have high-quality tenants, and it carefully matches its debt obligations with income from its leases. The best one will also do well even through economic slowdowns. As well, it will have taken advantage of low interest rates to refinance long-term mortgages.
Investors should focus on investing in the best real estate investment trusts. This includes wide geographic diversification, as well as room to expand existing properties with new condos, restaurants or cinemas.
Canadian real estate investment trust (REIT) ETFs can help cut your investment risk—but not completely
REITs are usually publicly traded (although they can be private—see below), and investors like REITs because they typically have a high dividend/distribution yield, based on the requirement that they flow through at least 90% of their taxable income to unit holders.
Canadian high dividend REITs must be a corporation that’s taxable and follow all the rules of being a corporation. They must invest 75% or more of their total assets in real estate and make at least 75% of their gross income from their properties, including rent, financing and sales. Like most stocks that are publicly traded, they must adhere to the rules of exchanges, and require no less than 100 shareholders.
Note that real estate still has risks—its value rises and falls with changes in the economy, interest rates and occupancy levels.
Avoid private Canadian real estate investment trusts—including ones that hold investments in small-town real estate
Small towns often depend on, at most, a handful of employers. (Although work-from home has eased that somewhat.) If one of the town’s main employers reduces its operations or shuts down, tenants leave town. As populations shrink, the town’s rental accommodation vacancy rate can go up and stay high indefinitely.
This problem is even more pronounced in a small town’s commercial real estate. Offices, storefronts and industrial space are more specialized than residential real estate, due to factors such as zoning, ceiling heights, pedestrian traffic, parking and so on. If apartments stay vacant for months, commercial space can stay vacant for years.
Even at the best of times, small-town real estate is harder and more expensive to finance than city properties. Because of the higher risk of cut-offs in rental income, lenders demand bigger down payments and higher mortgage rates. This makes small-town property harder and more expensive to sell.
Small-town real estate has to provide exceptionally high returns in good times to offset the higher risk of loss when the market turns downward.
Meanwhile, private REITs are unlike conventional REITs, because they are publicly traded. That means a private REIT calculates the value of its own units (just once a year) and needn’t reveal all the information that’s available to the public as with publicly traded investments. Some even portray this feature as a benefit—since it avoids the volatility and speculation of public markets.
On the other hand, staying private also cuts the likelihood that nosy outsiders and analysts will find out about and draw attention to hidden risks and problems that the REIT happens to suffer from.
The combination of these two “benefits”—a small-town focus plus a once-a-year valuation by the REIT’s insiders—would be enough to make us advise against investing.
Use our three-part Successful Investor approach for all of your investments, including a Canadian real estate investment trust (REIT)
Hold mostly high-quality, dividend-paying stocks.
Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
Downplay or stay out of stocks in the broker/media limelight.
What form of real estate investing do you consider the most relevant to your investing career?
What do you look at before you add a Canadian real estate investment trust to your portfolio?
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