Finding the Best REITs

5 min read

Quick History

A REIT is a company that owns and operates income-producing real estate assets. It was first introduced in the US in 1960 to allow the public to invest in commercial real estate without wholly purchasing the properties comprising the fund. Canadian REITs were established in 1993 when the first-ever REIT was listed on the Toronto Stock Exchange after the recession period from the late 1980s and early 1990s. A significant rise in the Canadian REITs’ total market capitalization in December 2017 amounting to about CAD 57 billion indicates continued interest in this strengthening investment vehicle (as measured by S&P Canada REIT).

How does a REIT work?

The fundamental concept of a REIT is to empower investors to place their money to work in assets that would contrarily be unaffordable to most people seeking to diversify in multiple real estate classes typically requiring a sizeable investment including those in commercial and industrial properties. In other words, investing in a shopping-mall business isn’t feasible for the ordinary investor, but a REIT could allow them to do such.

A REIT is composed of multiple role players including fund managers, dealers, analysts, acquisitions managers. Their responsibilities vary and can be resource intensive whereby they may be required to seek out potential properties to acquire, develop, and put up for lease. To provide capital for these properties, REITs will pool investors’ money, and in turn, investors will earn high dividends derived from the assets. The investors will be the majority shareholders of the REIT with the REIT distributing 90% of its income back to the investors.

US and Canadian REITs are similarly structured; US REITs are classified as corporations while Canadian REITs are structured similarly to mutual funds and unit trusts. Both are focused on income-producing properties but differ in a few ways. The unit holders in a Canadian REIT are responsible for the debts and other liabilities of the REIT however, in most cases, REITs shield their unit holders from such obligations.

REITs are also a tax-beneficial investment vessel where the company is not required to pay taxes on the income earned as long as the income is passed through to its investors. Foreign investors are still subject to Canadian Government withholding tax.

Canadian REIT Requirements:

  •    A REIT is not allowed to hold properties that are not qualified at any time during a tax year
  •    75% of REITs revenue should be derived from rent, mortgage interests, and capital gains from the sale of the properties
  •    75% of the total market value of all REIT assets should originate from Canada

How REITs Work Inside Your Portfolio

Investors generally aim to fulfill a few main goals including growth, wealth preservation, and of course income. While in search of portfolio diversification, it’s important to scrutinize each investment vehicle and conduct thorough due diligence to see how the investment may fit your portfolio.

Real estate marches to a different beat compared to investments in the stock market the market cycles are elongated and may span a number of years compared to a stock fluctuating on a daily basis with greater volatility. REITs have three main categories including Equity REITs, Mortgage REITs and hybrid REITs which is a combination of the first two.

REIT Investments in Canada

Canada has a promising economy, and there are a lot of potential investments for all types of investors. One of the main classifications of REITs involves the type of properties they are comprised of.

REITs in Canada are typically focused on the following sectors:

  1. Healthcare/Nursing homes
  2. Residential
  3. Industrial
  4. Offices
  5. Hotels
  6. Mortgage

Mortgage REITs comprise around 10% of the total REIT investments in Canada. These types of REITs provide mortgages and even financing options for trusts.

Benefits of Investing in a REIT

Investing in REITs can jumpstart your real estate investment in Canada saving you from all the hassles of work, cost, and the risks of maintaining the property yourself. There are a number of notable benefits to investing in REITs:

  1. Income Security – Positive income is generated through the stable and secure leasing of properties providing for an ongoing steady stream of cashflow.
  2. Minimal Investment – REITs allow for small savers to participate in owning real estate.
  3. Prices – The REIT prices are quoted in the TSX (Toronto Stock Exchange)
  4. Transparency – REITs need to adhere to Canadian Securities Regulation rules to file financial reports. Shareholders can review these publicly available reports.
  5. Liquidity – Shares of REITs are bought and sold on major stock exchanges every day.

Typical investors in REITs include:

  1. Income investors
  2. Growth Investors
  3. Leverage investors
  4. Investors seeking tax benefits
  5. RRSP, RRIF, RESP, and DPSP

Criteria to Look For

Not all REITs are publicly listed with a sizeable percentage remaining private. For most investors, the optimal way to invest in a publicly listed REIT is via the stock exchange. When evaluating the potential REIT to invest in, carefully examine a REIT’s qualifications.

  1. History – Review the potential REIT’s background especially on the dividend yield and the long-term dividend trend. Review the historical trends and look for stability in dividend payments.  
  2. Economic Strongholds – It is best to invest in a REIT where their properties are located in strong and stable economic regions poised for future growth.
  3. Expert Management Team – REITs hire a specialist management team to handle all investment activities. Take time to read more about the people behind the REITs management. An experienced and skillful management team can not only provide growth when the market is hot but also is able to sustain stability when the market cools.
  4. Quality Real Estate – Strategic real estate locations and tenants are significant underlying factors to the future portfolio growth of a REIT.

The strongest REITs will still perform well through an economic downturn due to a strong management team coupled with numerous other factors mentioned above.