Investing in Canadian REITs can be an excellent option for anyone looking to diversify their portfolio beyond stocks and bonds.
The thing is, not all of us are equipped with the time and money it takes to become landlords and invest in real estate directly.
The good news is: you don’t need to have a large wad of cash lying around to become a real estate investor – you can invest in Canadian REITS (Real Estate Investment Trusts) and thus gain exposure to the real estate market in bite-sized chunks.
Investing in Canadian REITs is fairly easy, given that they are typically very liquid and trade on the Toronto Stock Exchange like stocks. There are a number of REIT investments available in Canada, and we’ll be introducing some of the best Canadian REITS so that you can take advantage in 2022.
What Are REITs
Investing in Canadian REITs isn’t for everyone, but by the same token, there are many investors who swear by real estate and don’t feel secure unless it has a place in their portfolio.
Investors can buy REITs and own a basket of properties that are managed for you and other shareholders. You will then share in the income that the real estate generates. There will also be the possibility of capital gains if the value of the buildings and properties increases over time.
Canadian REITs own many different types of properties. They fall into these categories:
- Retail (Apartments)
Buying REIT stocks in Canada is easily done through your online brokerage. The mechanics are quite easy, as you can buy an ETF that holds a diversified basket of REITs from various categories. You can also choose to hand pick a few individual REITs if you want to focus on a certain type of asset.
If you don’t have a brokerage account yet, I recommend reading our Qtrade review. Qtrade is currently ranked as our #1 Canadian broker and offer a $2,000 cash back bonus for new accounts.
Investing in REITs is a wonderful portfolio diversifier, and portfolio managers consider REITs a distinct asset class. An income producing building that collects rent is certainly unique compared to a stock such as Apple that produces a product and sells them through other retailers.
REITs are considered a real or “hard” asset and they behave differently (compared to stocks and bonds) in certain economic conditions. Generally, an investment in a Canadian REIT offers a decent hedge against inflation, just as would your personal residential property and vacation property. And of course REITs by design, can offer a generous income stream. REITs are mandated to distribute 90% of their profits to shareholders.
Best Canadian REITs Comparison
If you are ready to dive right into the world of Canadian REITS, there are a number of REIT stocks in Canada to choose from. This allows you to specialize in a specific type of real estate, whereas a REIT ETF may not. Our top choices allow you to gain exposure to residential, retail, commercial, and industrial REITS in Canada.
|Real Estate Assets||Price Per Share*||Market Cap||Dividend Yield*|
|Allied Properties REIT (AP-UN.TO)||Owns 160 properties throughout major cities in Canada with a focus on office space and data centers.||$43.40||5.52B||3.92%|
|Canadian Apartment Properties REIT (CAR.UN)||The largest REIT in Canada, it operates 65,000 rental apartments and housing sites in Canada, Ireland, and the Netherlands.||$59.05||10.22B||2.47%|
|Granite REIT (GRT.UN)||Offers geographic diversification with 127 properties spanning 7 countries. Focuses on industrial, warehouse, and logistics properties.||$105.40||6.924B||2.83%|
|H&R REIT(TSE:HR.UN)||One of Canada’s largest REITs. Has holdings in single and multi-tenant properties throughout Canada and the US.||$15.95||4.60B||4.33%|
|Inovalis Real Estate Investment Trust (TSX:INO.UN)||A lesser known REIT that specializes in corporate clients in urban areas. All of its properties are located in France and Germany, giving you a great way to gain international REIT exposure.||$9.42||306.87M||8.76%|
|iShares S&P TSX Capped REIT Index ETF (TSX:XRE)||Has a long-standing reputation in Canada, and holds some of the top performing REITS in Canada, such as Canadian Apartment Properties and RioCan Real Estate Investment Trust.||$20.95||N/A||2.64%|
|Vanguard FTSE Canadian Capped REIT Index ETF (VRE.TO; TSE.VRE)||Seeks to track the FTSE Canada All Cap Real Estate Capped 25% Index. Maintains 100% North American holdings, with the majority of them being in real estate services, retail REITs, residential REITs and office REITs.||$38.61||N/A||2.90%|
Again, these are just a few of the best Canadian REITs and REIT ETFs, but we think they offer great diversification due to the variety in real estate holdings as well as geographic area. It’s also great to note that there are a number of Canadian REITS that pay monthly dividends.
How to Evaluate a REIT
The majority of REITs are equity REITs. They must invest the majority of their assets (75%+) into real estate or cash equivalents. In other words; they cannot produce goods or provide services with their assets.
REITs must also receive 75% of their income from those real estate assets as a form of rent, interest on mortgages, or sales of properties.
REITs must also pay a minimum of 90% percent of their taxable income in the form of shareholder distributions each year. In exchange REITs pay no corporate taxes. This is key to understand, since the tax liability for these earnings will fall to you when you invest in Canada REITs.
Therefore, classic earnings per share and dividend payout ratios cannot be considered to gauge the financial health of a REIT.
Instead we use the Funds From Operations and Adjusted Funds From Operations (FFO & AFFO for short). Those are the more relevant and most useful tools to analyze a REIT’s financial health and potential for performance moving forward. Those two metrics replace the earnings and adjusted earnings that we would use for a traditional stock.
While it’s different metrics, it’s all about cash flow and the REITs’ ability to sustain and increase their dividend payments.
Here’s a good primer on FFO.
It is important to consider not just the (A)FFO but also the (A)FFO per unit of ownership. One of the REITs’ favorite methods to finance their new projects is to issue more units. We need to make sure that the operations are not being funded (to an excessive degree) by creating more units, because this will dilute the value of the units that you hold as a current investor in the REIT.
Management has to make sure that any new properties it buys are still accretive to investors, meaning that the additional AFFO growth is enough to offset the dilution it took by issuing new shares to fund the property acquisitions.
In other words, AFFO per share needs to continue growing in order for the dividends to grow in a sustainable and secure manner.
More units means more shareholders, and that reduces your share ownership of the entire operation. And then there are more shareholders that are in line for those dividends. The total dividend obligation increases. For example, if there are an additional 500,000 shares created, there would be an additional 500,000 shares that would be in line for any ongoing dividends.
There are simply more mouths to feed!
Investors in Canadian REITs should keep an eye on the free cash flow generated by any new properties, and then the total free cash flows per unit. If the FFO per unit drops, that may signal that the REIT may have difficulty increasing or maintaining its dividend.
How are REITs Taxed?
This is an important distinction. While ordinary dividends from Canadian bank stocks or Canadian Telco stocks qualify for the dividend tax credit, REIT distributions come from many sources and each source can receive a different tax treatment.
Related post: Best Canadian Dividend Stocks for 2022.
The REIT distributions are usually in portions of eligible dividends, capital gains, return of capital, foreign income and other income.
Dividends are reported on a T5 form while distributions are reported on a T3 form. Your T3 form will break down the various forms of income.
Given all of the tax reporting and tracking complexities many will choose to keep their REITs in registered accounts such as the TFSA, RRSP and RRIFs. Those accounts grow tax free, there is nothing to track.
That said, REITs can also be quite tax efficient for taxable accounts. But you will have to have to have a good tax game, or hire an accountant to help you keep track.
Canadian REIT Recommendations
When it comes to choosing between REITs and understanding how the unique REIT cashflow model holds up versus traditional Canadian dividend champions like Fortis or RBC, our primary source of information is the Dividend Stocks Rocks (DSR) Platform.
Mike Heroux (the man behind DSR) has been writing about Real Estate Investment Trusts since they were first invented. Click here to see what DSR is all about and to take advantage of our exclusive MDJ lifetime discount.
Taking Dividend Investing to the Next Level
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What About Rising Interest Rates?
There is much chatter these days about inflation and the potential of rising interest rates. It turns out that REITs might offer a good hedge against that risk. REITs could perform well as core stock markets and bonds take a hit.
From this Cohen & Steers research note.
“Beginning in mid-2004, the Fed raised the federal funds rate 17 times, from 1.25% to 5.25%, during which time the U.S. annual gross domestic product increased from $11.5 trillion to $13.4 trillion. Over this period, REITs had a cumulative return of 57.9%, compared with just 15.5% for stocks and 5.9% for bonds.
While the current environment is not identical, there are key similarities, including strong job growth, an expanding economy and a general expectation of higher interest rates.”
That is some very good performance for a period (rising rates) that will often put a scare into investors. And while the study is based on US REITs, asset classes can share performance characteristics across borders. And of course, you can the option of investing in US REITs by way of ETFs or individual REITs.
And once again, REITs are known for the potential to offer some protection against modest inflation.
In the name of diversification we want assets that don’t always move together. We want some zig to go with that zag. It’s about portfolio teamwork.
Investing in Canadian REIT ETFs
Now that we’ve covered some of the best Canadian REITs to buy, it’s time to explore REIT ETFs.
As we mentioned earlier, you can pick and choose your favourite Canadian REITs. Given that, you might want to pay close attention to those categories of REITs. Due to the pandemic and the stay at home and work at home economy, office REITs, retail REITs, and Seniors Housing REITs were hit hard.
Although things may be looking up for 2022, it still remains uncertain how quickly things will bounce back. A risk averse investor might avoid those areas. That said, there may be incredible value in those REITs should we see a robust economic recovery and life somewhat goes back to “normal”.
REIT ETFs, just like any other ETF, offer buyers a way to passively invest in a large range of real estate holdings without having to worry about doing a lot of due diligence on individual REITs.
When it comes to investing in Canadian REITs, I like looking to ETFs and fund managers that I trust. On my site I covered the CI First Asset REIT, ticker RIT. That is Canada’s best performing REIT ETF and it is actively managed. That is a very good one-stop ETF option for Canadians. There are also a number of other cost effective Canadian and US REIT ETFs available to Canadians listed on the Toronto Stock Exchange.
Here are some of the most popular REIT ETFs available in Canada:
- CI First Asset Canadian REIT ETF (RIT)
- BMO Equal Weight REITs Index ETF (ZRE)
- iShares S&P TSX Capped REIT INDEX ETF (XRE)
- Vanguard FTSE Canada Capped REIT Index ETF (VRE)
- Purpose Real Estate Income ETF (PHR)
There is a lot more to explore on the topic of REIT ETFs. If you would still like to learn more, as well as find if REITs or REIT ETFs are right for you, check out our other article Owning Individual Real Estate Investment Trusts (REITs) vs REIT ETFs. We’ll take a closer look at some of our top recommendations for each option.
Luckily, no matter which option you choose, it’s easy to purchase REITs and REIT ETFs in Canada. We recommend Qtrade and Questrade as the best low-cost and reliable platforms for all of your investment needs.
Investing in Canadian REITs – FAQ
Final Thoughts on Canadian REITs
Canadian REITs offer investors essential portfolio diversification, access to international markets, and the ability to invest in real estate with much less capital and less risk. In addition, you get dividend payouts, putting money in your pocket without the stress and hassle of being a landlord.
Many investment managers recommend you allocate about 10% of your entire portfolio, and we agree. Especially in the pandemic economy, investing in REITs is an effective way to hedge your bets against stock volatility and inflation.
So, get started today to start your low-stress no-landlord-needed real estate investment journey!
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