The Basics of REITs
May 15, 2019
As of 2018, the Canada Pension Plan (CPP) had invested nearly $50 billion in real estate (representing 13% of its entire portfolio). Because of its long-term time horizon and immense size, the CPP can purchase real estate properties that are too large for the vast majority of individual Canadians to consider. However, individuals can gain exposure to these types of properties through Real Estate Investment Trusts (REITs).
A REIT is simply a company that owns (and usually operates) income-producing real estate properties. Most REITs operate in one of the following segments:
- Office
- Retail
- Residential
- Industrial
- Diversified (a combination of the above)
REITs are required to distribute at least 90% of the income they generate to unit-holders. This causes most REITs to pay above average cash flow and makes them especially attractive to investors seeking a regular income. In addition, there are four key advantages to investing in a REIT compared to buying individual properties:
1. Liquidity – Most REITs trade on the stock market and can therefore be bought or sold quickly and with low transaction costs.
2. Simplicity – The REIT oversees managing tenants, collecting rent and completing the necessary renovations and repairs.
3. Diversification – Most REITs own dozens (if not hundreds) of different properties, usually spread across Canada (and sometimes around the world).
4. Low Minimum Investment – REITs are more accessible to investors than buying entire properties.
There are numerous strategies that can be used to invest in REITs; some favour buying individual REITs or using actively managed funds, while other prefer passive ETFs (exchange traded funds). There are more than 30 publicly-traded REITs based in Canada and hundreds of others located in the United States and international markets.
If you are looking to further diversify your investments, adding an allocation to real estate in your portfolio might be worthwhile. Your financial advisor can help you determine whether this strategy fits your risk profile and is suitable to help you reach your objectives.
Daniel Sitar, CIM CFP BComm is an Associate Financial Advisor & Associate Portfolio Manager with RGF Integrated Wealth Management. The views expressed are those of the author and not necessarily those of RGF Integrated Wealth Management, which makes no representations as to their completeness or accuracy
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