Are REITs in Canada a good investment?
Top Canadian real estate investment trusts (REITs) are some of the best to buy now due to the fact that they can be highly defensive, generate attractive passive income, and have significant long-term growth potential.
- Allied Properties REIT. Dividend yield: 2.57% Dividend payout ratio: 10.23% ...
- Automotive Properties REIT. Dividend yield: 7.98% Dividend payout ratio: 10.23% ...
- Canadian Apartment Properties REIT. Dividend yield: 5.38% ...
- CT REIT. Dividend yield: 6.7% ...
- Dream Industrial REIT. Dividend yield: 5.38%
Interest Rate Risk
The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.
REITs have average annual return of 9.7 per cent
The TSX REIT Index dates back to 1997 and, since then, Canadian REITs have generated an average annual return of 9.7 per cent.
Along with all the monthly dividend payers, we've also decided to include Canadian REITs and Income Trusts. They are another way to earn strong monthly income. Those looking for monthly dividend income may be interested in investing in a real estate investment trust or income trusts, which provides just that.
U.S. REITs are corporations while Canadian REITs are mutual fund trusts. U.S. REITs are required to pay out 90% of taxable income as shareholder distributions vs. a 100% rule for Canadian REITs. Canadian REITs tend to use more debt to finance operations, including mortgages secured by property holdings.
REITs offer certain tax advantages to encourage this investment. In Canada, a REIT is not taxed on income and gains from its property rental business. Instead, shareholders are taxed on a REIT's property income when it is distributed, and some investors may be exempt from tax.
For purposes of the REIT income tests, a non-qualified hedge will produce income that is included in the denominator, but not the numerator. This is generally referred to as “bad” REIT income because it reduces the fraction and makes it more difficult to meet the tests.
REITs historically perform well during and after recessions | Pensions & Investments.
The lack of government regulation makes it difficult for investors to evaluate them since little to no information is available publicly. Also, they are not required to prepare audited financial statements.
What are the best REITs to invest in 2023 in Canada?
While CT REIT is one of the top Canadian REITs to buy for passive income, if you're looking for a REIT that can offer significant capital gains potential, I'd recommend you consider InterRent REIT (TSX:IIP. UN). InterRent is a residential REIT focused on rapid growth that owns properties in Ontario, Quebec, and B.C.
“We attribute the underperformance of REITs relative to the broad market to rising long-term interest rates, widening credit spreads and outsized returns for the Canadian energy and materials sectors,” Mark Rothschild, an analyst at Canaccord Genuity, wrote in a note to clients on Tuesday.
Investing in REITs in Canada
The easiest way for investors to add REITs to their investment portfolio is to purchase a REIT ETF through their discount brokerage account. The top REIT ETFs in Canada are BMO's ZRE, Vanguard's VRE, and iShares' XRE.
Canadian Apartment Properties was the real estate investment trust (REIT) with the largest market cap in Canada as of March 2023. The market cap, or the aggregate value of the total outstanding shares of the company was almost 6.1 billion U.S. dollars during that period.
- Granite REIT (TSX:GRT. UN) owns a portfolio of 137 institutional-quality industrial, manufacturing, and logistics properties across Canada, the United States, and Europe. ...
- First Capital REIT (TSX:FCR. ...
- BSR REIT (TSX:HOM.
| Stock | Forward dividend yield | Implied upside from Oct. 11 close |
|---|---|---|
| Simon Property Group Inc. (SPG) | 7% | 39.4% |
| Realty Income Corp. (O) | 6% | 49.2% |
| Extra Space Storage Inc. (EXR) | 2% | 35% |
| AvalonBay Communities Inc. (AVB) | 3.7% | 31.3% |
Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making. Many REITs are publicly traded on exchanges, so they're easier to buy and sell than traditional real estate.
This model originated in the United States - the largest REIT market worldwide. European countries with an established market include the UK, Belgium, and France. In the Asia-Pacific region, the biggest markets are Japan, Hong Kong, and Australia. In Japan, public REITs held 11.5 trillion Japanese yen in 2022.
But recent insights from global investment management firm Cohen & Steers indicate that today may, in fact, be an opportune time to invest in traded REITs as they may be among the first beneficiaries as the real estate cycle moves from recession to recovery.
Holding REITs in retirement plans
If you hold an interest in a REIT as part of a tax-advantaged retirement savings plan, such as an IRA or 401(k), the different types of tax treatment don't really matter. That's because investment returns in such plans are not taxed when earned.
What are the rules for REITs in Canada?
To be classified as a REIT, the entity must pay out a certain percentage of its taxable income to unitholders. In Canada, all taxable income must flow through the entity for it to maintain its REIT status.
In fact, the IRS requires that at least 90% of a REIT's taxable earnings are to be distributed to shareholders in the form of dividends. This is one primary reason why REITs are viewed as a strong investment and source of passive income.
All it takes is one advantageous investment to retire a millionaire thanks to the power of time and compounding interest. It's how investors who put $10,000 into Amazon a little less than 25 years ago would be sitting on over $21 million today.
Risks of REITs
REITs closely follow the overall real estate market and are subject to much of the same risks, including fluctuations in property value, leasing occupancy, and geographic demand. Real estate is typically very sensitive to changes in interest rates, which can affect property values and occupancy demand.
The threats are higher borrowing costs and decrease in property values. Sharp declines in share prices could also occur due to heightened volatility. Nonetheless, REITs with strong fundamentals can negate or overcome the impact of rising rates.
Summary. The Fed's hawkish rhetoric suggests fewer rate cuts in 2024 and a possible rate hike in 2023, leading to a sell-off in REITs. However, historical data shows that REITs have performed well in rising interest rate environments.
However, an examination of the historical record suggests that this is a misconception. Although interest rates certainly affect real estate values and, therefore, the performance of REITs, rising interest rates do not necessarily lead to poor returns.
Any increase in the short-term interest rate eats into the profit—so if it doubled in our example above, there'd be no profit left. And if it goes up even higher, the REIT loses money. All of that makes mortgage REITs extremely volatile, and their dividends are also extremely unpredictable.
The ongoing higher interest rate environment will continue to create challenges for commercial real estate (CRE). However, our review of REIT balance sheets and debt suggests that REITs are well-positioned for economic uncertainty in 2023 because of their strong balance sheets.
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
Why I sold my rental property to buy REITs instead?
Perhaps the biggest advantage of buying REIT shares rather than rental properties is simplicity. REIT investing allows for sharing in value appreciation and rental income without being involved in the hassle of actually buying, managing and selling property. Diversification is another benefit.
| Dividend Stock | Description |
|---|---|
| Fortis (TSX:FTS) | Utility company serving 3.4 million customers. |
| BCE Inc. (TSX:BCE) | Wireless and internet provider with roughly 10 million customers. |
| Enbridge (TSX:ENB) | Midstream oil company that transports 30% of oil produced in North America. |
Overall, Canada's housing market is on the path to recovery. We expect sales activity to gradually grind lower through 2023 before rebounding in the second half of the year and into 2024. Falling borrowing costs and support from elevated levels of immigration should help drive the market forward.
The national average home price is forecast to decline by 3.3% on an annual basis to $680,686 in 2023. This is down from CREA's previous forecast, owing primarily to the compositional impact of lower sales in Ontario and British Columbia, by far Canada's two most expensive provinces for real estate.
It does appear based on recent data that the Fed's rate increases are starting to bring inflation under control. This is again a positive sign for REITs. REITs have already traded down significantly in response to the rise in rates, so they are poised for a rebound.
By contrast, private REITs, which are classified in Canada as Exempt Market Products (EMPs), are not listed on any stock exchange and are offered under prospectus exemptions.
The Cheapest Option: REITs—$1,000 to $25,000 or more
A REIT offers the investor a relatively high dividend as well as a highly liquid method of investing in real estate. Most real estate investments are not easy or quick to get out of. An exchange-traded REIT is. Moreover, you can start small with a little bit of cash.
| Stock | Forward dividend yield | Implied upside from Oct. 11 close |
|---|---|---|
| Crown Castle Inc. (CCI) | 6.6% | 44.9% |
| Simon Property Group Inc. (SPG) | 7% | 39.4% |
| Realty Income Corp. (O) | 6% | 49.2% |
| Extra Space Storage Inc. (EXR) | 2% | 35% |
- CIBC Wood Gundy.
- BMO Nesbitt Burns.
- Scotiabank.
- National Bank Financial.
- IA Private Wealth.
- IG Wealth Management.
- Raymond James.
- Edward Jones.
Investing in REITs in Canada
The easiest way for investors to add REITs to their investment portfolio is to purchase a REIT ETF through their discount brokerage account. The top REIT ETFs in Canada are BMO's ZRE, Vanguard's VRE, and iShares' XRE.
Can you become a millionaire investing in REITs?
All it takes is one advantageous investment to retire a millionaire thanks to the power of time and compounding interest. It's how investors who put $10,000 into Amazon a little less than 25 years ago would be sitting on over $21 million today.
If you invested in the REIT outside of your Roth IRA, the dividends would be taxed as income. In many ways, investing in REITs in your Roth IRA is the ideal way to invest in a REIT. Their dividends greatly compound over time and you won't have to pay taxes on them when you reach retirement age.
Is a Roth or traditional IRA the best choice? To be clear, retirement accounts are ideal places to hold REIT investments, as the benefits of tax-deferred investing can magnify the already tax-advantaged nature of these companies.
- High-interest savings ETFs.
- Treasury Bills and Notes.
- Bonds.
- Preferred Shares.
- Mortgage Backed Securities.
- Annuities.
- Blue-chip stocks.
- Index funds.
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To qualify as a REIT, a trust needs to be a publicly traded unit trust that is resident in Canada and must meet tests set out in the Income Tax Act (Canada) (the “ITA”) based on, among other factors, the nature and quantity of real estate assets owned and the sources of trust revenue.
The Nareit All Equity REIT index has posted positive total returns year-to-date in 2023 after a steep decline in 2022. Nareit has also chronicled the spread between public and private markets, and although that gap has narrowed in 2023, there is still room for convergence.
