US and Canadian REITs

5 min read

REITs are one of the most popular investment channels among investors as a way of portfolio diversification and long-term stability. REITs offer a way for investors to access real estate that would have otherwise been inaccessible. This may include owning a fraction of a major shopping center or a major hotel portfolio.

Real Estate Investment Trusts or REITs began in the US, and since then, other countries including Australia, Turkey, and Canada have created REITs structured similarly with that of the US. Today, about 35% of REITs are operating outside the US operating across various real estate markets.

Over the past 11 years, international REITs have nearly matched US stocks and outperformed global stock returns. More recently, REITs have come to pay higher dividend yields compared to US and international stocks.

Canada and the US

Canada comprises 3% of the world’s total market capitalization, and its markets serve to be over-weighted in sectors like resources and financial services. Canadian investors are diversifying their portfolios through investing in global markets to manage risks.

Outside the US REIT market, Canada is noted to have some of the most exciting opportunities. REITs in the US and Canada are similar in structure with a few notable differences. Canadian REITs are classified as unit trusts and mutual funds trusts whereas US-based REITs are classified as corporations. Under a unit trust structure, unitholders are responsible for the debts along with other liabilities of the REIT.  Canadian REITs can be open or closed-ended. The primary differences between these REITs are related to the types of property held.

The US has around four times as many REITs as Canada. The Canadian REIT market is primarily dominated by few large names. Both Canadian and the US REITs are structured by composition, legal structures, currency exchange rates, market operations, government market intervention, and indices.

There is quite a notable difference between the REITs from both countries:

  • Ownership – Canadian REITs can be open- or closed-ended. The main distinctions between these REITs are associated with the types of properties held. A US REIT is required to have at least 100 shareholders and less than 50% of the prominent shares concentrated in the palms of five or fewer shareholders
  • Assets – US REITs should have 75% of its assets invested in real estate properties, mortgages, and shares in other REITs and government securities. For Canadian REITs, Open-end trusts require 95% or more of the Fair Market Value or FMV of all units must have the right of redemption by the holder. On the other hand, closed-end trusts must include at least 10% of its property to bonds, shares or securities in the capital stocks of any single corporations except for government securities. 80% of closed-end assets requires properties located in Canada.
  • Distribution – A US REIT requires the delivery of 90% of its taxable income to its shareholders including capital gains while Canadian REITs may distribute 100% of its annual taxable income but may stop or change at any given time.
  • Income – Both US and Candian REITs must earn 75% of their assets from rents, mortgages, and interests from their real estate properties. 95% of the gross income should also come from the sale of these assets including dividends, interest, and gains from sales of securities.
  • Exchange-Listed – US REITs should be publicly listed while unit trusts define that if the trusts’ real property holdings allow it to be closed-end trusts, then they should be listed under the Canadian exchange on the same or the following year.

The Canadian REIT Index has delivered a 10% growth in 2017, in line with the 5%-15% expectation. This performance was influenced by 4 notable factors: the volatility of the Canadian dollar, commodity prices, and oil; interest rates; overall negative view towards the Retail sub-sector; and checking property fundamentals. Mortgage REITs, on the other hand, topped the US REITs index in 2017 with a 19.8% total return.

In 2016, the Toronto Stock Exchange REIT Index gained a 14.8% total return, outperforming its US counterpart. This increase marks a stunning investment opportunity for Canadian investors. According to NAREIT, the Canadian REIT Index yielded 5.9% in 2017 with strong impacts from most non-oil and gas economy cities.

Canadian REIT Outlook

Around 90% of the REITs in Canada are listed publicly at the TSX (Toronto Stock Exchange), and a majority of them are open-ended trusts. Income distribution in Canada is set individually by each REIT usually varying from 85-95% of the taxable income from 2006.

Over the past two decades, the quantity of Canadian REITs grew from 1984-2017.  There are currently 47 existing REITs in Canada.

Canadian REITs flourish in these sectors:

  • Office Space
  • Housing
  • Diversified
  • Hotel/Resort and Leisure
  • Industrial
  • Mortgage
  • Retail

REITs in Canada control almost one-third of the total retail industry. Retail REITs include services associated with many housing and office properties. This share-of-space rule focuses 50% of its area for retail thus contributing the most significant property share in Canada’s REIT market.

The REITs that are not focusing on the retail are called as ‘Diversified’ such as the residential, industrial, and offices.

Demographics show that people are now concentrating on living, working, and relaxing in just one place. It is an excellent time for REITs to market on re-zoning and adding more property values especially in the sectors of residential, technology, retail, and office industries. Big cities like Montreal, Toronto, and Vancouver, are the best areas for expansion.

Disadvantages of International REITs

Although international REITs have outstanding potential, there are a few risks that investors should consider.  Investing directly to global REITs market imposes a lot of potential disadvantages such as irregular dividend depending on the company or country you are investing in, currency risks which may create unpredictable losses, limited information, and illiquid trading.

Time to Go Global

The current market outlook seems positive for global real estate as REITs deliver great output in an increasing-scale environment where robust economic growth and lower unemployment rates lead to stronger demand for real estate. Canada’s improving economy provides for fertile ground for many REITs to grow and prosper.