What is the average return on a REIT in Canada?
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. The TSX Composite Index delivered a seven per cent average annual return during that time.
“The REIT industry overall has turned in very strong long-term returns, averaging more than 10% per year over the past 10, 20, and 30 years, so there isn't much that needs to be done to make them more attractive,” says Craig Leupold, president of Green Street Advisors in Newport Beach, Calif.
The earnings for companies in the REITs industry have declined 62% per year over the last three years, Revenues have also declined 47% per year. This means overall sales from these companies are declining and profits are subsequently falling as well.
Investing in real estate investment trusts (REITs) offers many benefits for Canadian investors. Buying high-quality REITs is a great way to diversify your portfolio, generate income, and take advantage of the stability and growth potential of the Canadian real estate market.
In the past decade, the average annual appreciation of Toronto's residential real estate market has been a remarkable 8.3%! With this level of growth, investing in Toronto's real estate market is undoubtedly a smart decision.
Remember, REITs typically distribute 80 to 95% of their income after expenses to shareholders. So if the FFO payout ratio is below 80%, there's a good chance the REIT will increase the payout. If the FFO payout ratio is close or above 95%, there's a good chance a cut may be coming.
| 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% |
Historically, REITs have performed well compared to stocks, especially over long periods. For example, over the last 45 years, REITs, as measured by the FTSE Nareit Composite Index, have produced a compound annual average total return (stock price appreciation and dividend income) of 11.4%.
Small-cap REITs outperformed with +8.59% return in June 2023. Infrastructure and office were the worst performing sectors YTD 2023. Top retail REIT market caps fell in 2022, but 3-year returns are still positive. REITs trade at discounts to NAV, especially offices and hotels.
REITS are now trading at historically severe discounts as investors have been racing to cash out from real estate funds, a key indication high interest rates and economic uncertainty have created upheaval within the commercial property sector.
Why are Canadian REITs down?
“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.
Regular Income.
REITs in Canada generally offer attractive yields, and most pay regular monthly dividends.
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.
REITs historically perform well during and after recessions | Pensions & Investments.
Market cap of the REITs market in Canada 2020-2023
As of March 2023, the aggregate market capitalization, or the market value of the outstanding shares of stocks of all REITs, amounted to 85.5 billion Canadian dollars. REITs are companies that own or finance rental real estate.
Average ROI in the U.S. Real Estate Market
Investment strategies affect the return on investment, and different types of properties attract investors employing different strategies. Residential properties generate an average annual return of 10.6%, while commercial properties average 9.5% and REITs 11.8%.
Commercial properties are considered one of the best types of real estate investments because of their potential for higher cash flow. If you decide to invest in a commercial property, you could enjoy these attractive benefits: Higher-income potential.
Generally, a good ROI for rental property is considered to be around 8 to 12% or higher. However, many investors aim for even higher returns. It's important to remember that ROI isn't the only factor to consider while evaluating the profitability of a rental property investment.
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.
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
How much should you hold in a REIT?
“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.
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.
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.
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.
PLD is one of the best REITs to buy given its exceptional track record for creating value for investors. Prologis has hiked dividends 12.5% annually over five years and keeps payout low at around 62% of FFO. This points to an exceptionally secure and rising dividend.
Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are one of the best ways to invest 1,000 dollars, and are beginner-friendly. An REIT pools investor funds together to purchase real estate properties.
Do REITs Have High Leverage? In some cases, REITs use lots of debt to finance their holdings. Some trusts have low amounts of leverage. It depends on how it is financially structured and funded and what type of real estate the trust invests in.
There have been very few REIT bankruptcies over the past 50+ years. You can literally count them on one hand, and the majority of these bankruptcies were overleveraged mall REITs.
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.
Many companies, including certain REITs and business development companies, or BDCs, pay dividends every month as opposed to quarterly.
What is the largest REIT company in Canada?
Choice Properties Real Estate Investment Trust is a Canadian unincorporated, open-ended real estate investment trust (REIT) based in Toronto, Ontario. It is the largest real estate investment trust in Canada, with an enterprise value of $16 billion.
The problem with REIT investments is the lack of control over the investment, the risk of poor management, and the market volatility affecting returns.
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.
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.
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.
There's only one catch: the payouts are not generated from the company's earnings. This largely explains why so many REITs have low payout ratios. In equity research, the payout ratio is the percentage of net income that a company pays out as dividends.
Perhaps it's time to buy the dip and stash the high-quality REIT in a tax-free savings account (TFSA) before units recover throughout 2023. REITs do well in a TFSA. Their income distributions are generally taxed at your marginal tax rate.
Similar to U.S.-based mutual funds, any capital gains distributions from U.S. REITs will be taxable as foreign income on your Canadian tax return at marginal tax rates and will not be eligible for the 50% capital gain inclusion rate.
Although REIT distributions function as dividends, they are not considered as such when it comes time to file your taxes and typically bow to your marginal rate. Thankfully, they can be safely held in registered accounts such as a TFSA, RRSP, RRIF, and the like.
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.
How do you qualify for a REIT in Canada?
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.
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.
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.
On average, REITs outperformed the S&P 500 by 3.6 percentage points during these periods. In periods of moderate inflation, REIT dividends more than compensated for the higher price returns on the S&P, leading total returns on REITs to exceed the S&P 500 by 2.4 percentage points.
Moriarity explained that when the Fed stopped raising rates over the last four cycles, REITs have tended to outperform following that rate hike cycle ending. “Not only do they perform really well, they actually outperform equities broadly and also private real estate,” Moriarity said.
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.
Investing in real estate investment trusts (REITs) offers many benefits for Canadian investors. Buying high-quality REITs is a great way to diversify your portfolio, generate income, and take advantage of the stability and growth potential of the Canadian real estate market.
What Is a Good Return On Investment? In the current environment, a return of between 8% and 10% year-on-year is positive. If you take on more risk, the returns could be higher—but so too could the losses.
5 percent of the value of the REIT's total assets may consist of securities of any one issuer, except with respect to a taxable REIT subsidiary. 10 percent of the outstanding vote or value of the securities of any one issuer may be held (again, a taxable REIT subsidiary is an exception to this requirement)
30% Rule. This rule was introduced with the Tax Cut and Jobs Act (TCJA) and is part of Section 163(j) of the IRS Code. It states that a REIT may not deduct business interest expenses that exceed 30% of adjusted taxable income. REITs use debt financing, where the business interest expense comes in.
What is the average return on a Canadian portfolio?
The long-term annual rate of return on the S&P/TSX Composite Index (TSX) was 9.3% per year between 1960 and 2020. 1 We expect average returns for Canadian equities to be in the range of 6.0% to 7.5% and average returns for long-term fixed-income investments to be in the range of 3.0% to 3.5% over the long term.
- High-interest savings ETFs.
- Treasury Bills and Notes.
- Bonds.
- Preferred Shares.
- Mortgage Backed Securities.
- Annuities.
- Blue-chip stocks.
- Index funds.
It comes down to the type of investments you make, your tolerance for risk, your goals, and much more. That being said, conventional financial wisdom says a good ROI is anything over 7%.
The total expenditures made by the REIT, or any of its partners, during the two years preceding the sale of the land may not exceed 30 percent of the net selling price of the property (IRC § 857(b)(6)(C)(ii)).
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.
Beginning with its second taxable year, a REIT must meet two ownership tests: it must have at least 100 shareholders (the 100 Shareholder Test) and five or fewer individuals cannot own more than 50% of the value of the REIT's stock during the last half of its taxable year (the 5/50 Test).
For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.
By law and IRS regulation, REITs must pay out 90% or more of their taxable profits to shareholders in the form of dividends. REIT investors who receive these dividends are taxed as if they are ordinary income. Plus, whether REITs are public or private, they must pay out the standard 90% of their income.
Although it is widely believed that REITs enjoy two special and inherent hostile takeover defenses, public REITs are as vulnerable to hostile attack as any other public company.
48 Hour Clause/Shorter Period Clause
It enables the seller to continue to market their property until the buyer sells their property. If the seller receives a better offer, the seller can give the contracted buyer two (2) clear business days' notice of their intention to accept the alternate offer.
What are the 3 conditions to qualify as a REIT?
- Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries.
- Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales.
- Pay a minimum of 90% of taxable income in the form of shareholder dividends each year.
