Ultimate Guide to REITs in Canada

By Jeff Scholz | 21 Aug 2023 |

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    Investors have different avenues and asset classes for allocating capital and buliding wealth in the long run. You’ve heard them before: stocks, bonds, cryptocurrencies, gold, commodities, and real estate. However, purchasing real estate can be expensive as it requires significant capital to buy residential or commercial properties. However, as an alternative, look at investments in real estate investment trusts or what we call REITs.

    REITs are asset classes that provide investors with opportunities to generate returns via a steady stream of dividend income and long-term capital gains. They are similar to stocks and can be purchased and sold on any major exchange. It only means that one can gain exposure to the real estate market even with a few hundred dollars. Real estate investment trusts are financial companies that own portfolios of income-generating properties. These companies need to meet specific requirements to qualify as a REIT.

    How to purchase REITS in Canada

    REITs are funds that trade on exchanges under a ticker symbol, just like equities. They are incredibly easy to purchase, and there is a wealth of information on specific REITs and their performance. To buy a REIT, you must have a brokerage account to purchase the shares on the open market. Now that you know how to purchase REITs let’s look at the options available for investing in real estate investment trusts.

    Types of REITs

    REITs are invested in certain types of property or property for certain purposes. This step allows you to gain specific exposure to properties instead of the entire real estate market. For example, REITs can be based on a particular type of real estate, such as residential or commercial. These are the foundation of REIT ETFs in Canada; funds based on the performance of an index of the top REITs. Lastly, mutual fund managers look to REITs are a safe source of income and long-term growth. We will look at each of these below in more detail.

    Office REITs

    • Office buildings
    • Factories
    • Manufacturing
    • Warehouses
    • Logistics
    • Storage buildings
    • Medical office buildings
    • Medical clinics
    • Health centers
    • Other spaces for health services

    Residential & apartment REITs

    Portfolios for residential REITs might include high-rise, mid-rise, and low-rise apartment buildings, multi-unit rental properties. They can also include single-family rental homes. For example, Canada’s largest REIT, Canadian Apartment Properties REIT (CAR.UN), owns more than 57,743 units in Canada, with an average monthly rent per unit of $1,282 in 2020.

    Commercial REITs

    Also called Diversified REITs, commercial REITs will include warehouses, office buildings, industrial buildings, hotels, multifamily residential, and retail. These properties all have tenants who generate income. Typically, these properties have lease contracts that are more extended than residential properties. As one of Canada’s largest REITs, H&R REIT (HR.UN) invests in commercial properties. H&R’s portfolio consists of 38% offices, 31% retail, 23% residential, and 8% industrial rentals.

    Retail REITs

    REITs under retail fall under commercial properties, while some focus on retail exclusively. Retail property types that retail REITs might own may include shopping plazas, malls, strip malls, big-box stores, and single-tenant properties. For example, RioCan (REI.UN) has a significant portfolio because it is the second-largest REIT in Canada.

    Retail tenants for RioCan include Canadian Tire, Loblaws, Walmart, Shoppers Drug Mart, Tim Hortons, BMO, and TD. In addition, some REITs may even focus on some specific tenants. For instance, Slate Grocery REIT (SGR.UN) focuses on grocery-anchored real estate, while CT REIT (CRT.UN) leases mainly to Canadian Tire.

    Industrial REITs

    Industrial REITs like Granite Real Estate (GRT.UN), are among the best-performing REITs in the country over the past five years. These types of REIT might own properties connected to industrial production like factories, logistics, manufacturing, warehouses, and storage buildings. Granite REIT has a portfolio that includes 71% distribution and e-commerce, 17% of notable purpose buildings, and 11% warehouses. Only 1% are flex or offices.

    Healthcare REITs

    Canada only has two Healthcare REITs in Canada: NorthWest Health and Chartwell Retirement Residences. One is NorthWest Healthcare, which owns medical office buildings, clinics, health centres, and other spaces for health services. Chartwell is the other one and owns retirement homes and long-term care homes.

    We have a comprehensive article on the best REITs in Canada, but here are some examples below.

    Smartcentres REIT

    In Vaughan, Ontario, SmartCentres Real Estate Investment Trust (SRU.UN) was founded in 1994 and 2016 and had over 300 employees. This REIT specializes in retail property, especially those big-box malls. Smartcentres investments mean they potentially handle the process of Ontario eviction while you relax and collect dividends. Most, if not all, SmartCentre locations have a Walmart as anchor tenants.

    H&R REIT

    Toronto-based H&R Real Estate Investment Trust (HR.UN) is Canada’s third-largest REIT. It specializes in commercial real estate. This REIT owns 161 retail locations, 105 industrial properties, 40 office buildings, and 11 other investments.

    Riocan REIT

    Canada’s second-largest REIT, RioCan Real Estate Investment Trust (REI.UN). It primarily owns supermarkets and neighbourhood convenience shopping centres. They ensure no company makes up over 10% of its rental revenue to diversify its tenants.

    Artis REIT

    As Canada’s largest diversified REIT, Artis Real Estate Investment Trust (ARY.UN) is based in Winnipeg, Manitoba. This company owns a portfolio of office, industrial, and retail properties across Canada and the United States. By September 2021, Artis REIT owned a total of 171 commercial properties.

    Granite REIT

    A Toronto-based REIT, Granite Real Estate Investment Trust (GRT.UN), formally created its company after spinning itself off the Magna Group. It specializes mainly in multi-residential apartment buildings across Europe and the North Americas. In addition, this trust focuses on e-commerce and distribution properties.

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    REIT ETFs are managed funds which seek to track the performance of an index of REIT stocks. A great way to diversify your real estate investments is through REIT ETFs in Canada.

    Invesco S&P or TSX REIT Income Index ETF (TSX: REIT)

    This ETF follows the S&P/TSX Capped REIT Income Index and tracks 19 Canadian REITs paying dividends. In addition, it rebalances twice a year in January and July. This index has holdings that depend on the risk-adjusted dividend yield of its partner REIT. Therefore, with higher the dividend yield this REIT offers, the more weight gets placed on that REIT. During the past three (3) years, Invesco REIT ETF has returned 24%, making this ETF yield a 3.847% dividend.

    BMO Equal Weight REITs Index ETF (TSX: ZRE)

    The ETF of this REIT follows the Solactive Equal Weight Canada REIT Index and puts the same weight on 22 REITs. For instance, WPT Industrial REIT (WIR.U) creates up 5.80% of the index, Boardwalk REIT (BEI.U) makes up 4.76% of the index, and Choice Properties (CHP.U) consists of 4.42% of the index. For the past five (5) years, its REIT ETF has returned 36.5% and an annual dividend yield of 3.716%. BMO charges 0.55% yearly maximum management fees for a 0.61% management expense ratio (MER).

    Vanguard FTSE Canadian Capped REIT Index ETF (TSX: VRE)

    This REIT patterns its ETF to the FTSE Canada All Cap Real Estate Capped 25% Index, composed primarily of REITs, 25% of which are real estate company stocks. For instance, FirstService Corporation makes up 13%, and Colliers International Group makes up 7.5%. This step lets the index follow different real estate stocks (small-cap, mid-cap, and large-cap) aside from REITs. The past five years allowed VRE of 45%, with dividends yield at 2.89%. They charge a 0.38% MER.

    iShares S&P or TSX Capped REIT Index ETF (TSX: XRE)

    Following the iShares S&P/TSX Capped REIT Index ETF, this REIT limits any individual REIT to a quarter of the ETF’s portfolio. Canadian Apartment Properties REIT is the largest holding, making up 15%, with RioCan following suit at a competitive 10%. XRE had a 23% return in five years, with dividends yielding 2.775%. Their total 5-year return was 46%, including dividend distributions. Additionally, iShares charges a 0.61% MER.

    CI Canadian REIT ETF (TSX: RIT)

    As an actively managed ETF, CI Global Asset Management invests in REITs, REOCs (real estate operating corporations) and also with real estate companies. For instance, this ETF invests 5% shares of a rental housing company Tricon Residential. The past five years showcased a 30% return for RIT, yielding a 4.02% dividend and charging a 0.86% MER.

    Harvest Global REIT Leaders Income ETF (TSX: HGR)

    Harvest Global REIT ETF is comprised of REITs and REOCs that help it promote outside of Canada, let alone worldwide. Significantly, based on geographic allocation, the United States leads with 65.6% weighting, Australia at 10.6%, the United Kingdom at 5.5%, and Singapore at 5.4%. They invest in various REITs, including REITs for hotels and resorts, mortgages, and specialized REITs like telecommunications infrastructures. HGR aims to generate income by writing covered call options through a covered call strategy. This move creates income, helping boost the ETF’s dividend yield. Over the last five years, HGR returned only 0.3% and had a 5.61% dividend yield. Their total return over the previous five (5) years was 22%, also taking into account dividend distributions. In addition, HGR has an MER that charges 1.36%.

    How can I invest in REIT ETFs?

    REIT mutual funds

    Some mutual funds in Canada are composed of only REITs or real estate companies. These funds need minimum initial investments that range from $100 to $500. Typically, mutual funds require a lower minimum investment for subsequent additional investments. On that note, a significant disadvantage of mutual funds is that they have higher annual management fees. On the other hand, ETFs offer lower costs and more accessible entrance and exit ways. Some of these Canadian REIT mutual funds include the following:

    CIBC Canadian Real Estate Fund

    This REIT mutual fund invests mainly in Canadian REITs and real estate companies like FirstService Corp and Sienna Senior Living. From 2016 to 2020, it only had a net asset value (NAV) increase of 5% per unit in five (5) years. CIBC’s Class A mutual fund charges a 2% annual management fee, while CIBC’s low-fee Class F mutual fund charges a 1% yearly management fee.

    Fidelity Global Real Estate Fund

    This real estate mutual fund invests in REITs and real estate companies worldwide. Prologis is the largest at 8.12% holdings; Digital Realty Trust at 4.66% holdings; and Duke Realty at 3.72% holdings. The past five years have proven this mutual fund returned 30.4%, with an MER of 2.02% to 2.31%. The mutual fund has annual fees from 2.12% to 2.41% in the range of trading expense fees.

    Canada Life Global Real Estate Fund

    This real estate mutual fund holds REITs worldwide, roughly 25% in real estate companies. Canada Life charges an annual management fee ranging from 0.80% to 2.00%, depending on your mutual fund series, with an administration fee ranging from 0.15% to 0.28% annually.

    Why should I invest in REITs?

    Although similar to most other investments, REITs also carry certain risks. So let’s check the pros and cons of investing in real estate investment trusts.

    Benefits of investing in REITs

    Let’s consider the most important benefits one can have from exposure to REITs.

    Regular capital gains and dividend payments

    Real estate investment trusts possess business models to generate predictable cash flows. This process, in turn, helps them pay attractive dividends to shareholders. Different REITs that trade on the TSX and NYSE have more than 5% dividend yields. The average yield for companies that deal on the S&P 500 is only over 1%.

    With that said, REITs attract those who aim to derive passive income or those who have investments. It also gravitates towards those who reinvest their dividends, benefiting from powerful compounding. Potentially, REITs also have the power to increase your returns via capital gains. Like stocks, the value of REITs will increase primarily if the company focuses on acquiring new properties and expanding its cash-generating assets base. As a result, multiple REITs have generated higher returns than the broader markets, primarily if real estate performs well.

    REITs operate across sectors.

    Multiple types of REITs operate across numerous sectors. REITs are divided into five broad types: Residential, Mortgage, Commercial, Healthcare, and Retail. Although most people buy a house sometime in their lives, it’s unlikely that they’ll buy a commercial property. But by investing in REITs, we can own a piece of a shopping mall, a residential complex, a hospital, or even a Class-A office tower.

    Provides diversification and liquidity

    There are risks involved in investing in multiple asset classes, which you can also diversify and eventually lower. REITs can do this for you easily, as REITs are essentially the same as equities. In addition, you can choose what type of sector you want to invest in real estate. Otherwise, getting exposed to different industries can generally be out of reach for most retail investors.

    Consequently, it may take a couple of months before completing a purchase or sale transaction involving physical real estate properties. But as REITs get traded on exchanges, selling these instruments can be done with a button. They are very easy to access and highly liquid.

    What are some setbacks linked with REIT investing?

    There are a few drawbacks associated with investments dealing with REITs you can consider.

    REIT investments have sensitivity to interest rates

    Interest rates and real estate investment trusts have an inverse relationship. In essence, high-interest rates are not suitable for REITs. Generally, REITs use leverage to acquire properties which means they have to make regular interest payments. If the interest rate is falling, these payments will also decline, which will boost the bottom line of REITs. Further, rising interest rates tend to move the capital from higher-risk investments like stocks and REITs to low-risk asset classes such as bonds.

    Specific risks with REITs

    As stated earlier, REITs add diversification to your portfolio’s potential investment. But most individual REITs are not diversified and focus on single sectors or particular property types. Moreover, the last year has proven that commercial and retail REITs fell under the pump of the ongoing pandemic that led to the economy’s inevitable lockdowns. As an alternative, REITs in the residential and healthcare sectors outperformed their counterparts in 2020.

    When the case of equities is concerned, it makes perfect sense to purchase REIT exchange-traded funds or ETFs that potentially lower your risks significantly. An example is the ETF BMO Equal Weight REITs Index ETF or ZRE. It aims to replicate the solid performance of the Solactive Equal Weight Canada REIT Index and their great net of expenses. As designed for investors who look for growth solutions, ZRE gives you exposure to various Canadian REITs. Exchange-traded funds have maximum annual management fees of 0.55%, with a 0.61 management expense ratio.

    Before April 2021 ended, ZRE had an annualized distribution yield of 4.46%. So if you held an investment worth $10,000, this ETF would generate $446 worth of annual dividend payments for you. ZRE has also garnered a whopping 20% in the last five years. So you can also earn on asset appreciation.REITs as an asset class have historically derived competitive returns, primarily driven by high yields and long-term capital appreciation. It has a low correlation with most other asset classes, making them attractive to own and lowering your overall risk. Learn how to get started in real estate in Canada without buying property.

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    About The Author: Jeff Scholz
    Jeff is the co-founder of Money, Eh? (moneyeh.ca) a website built for Canadians to learn about personal finance, investing and more. His mission is to ensure every person in Canada has the ability to become a master of their finances and put their money to work for them.

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