The Toronto Stock Exchange and REALPAC just celebrated their 25th anniversary of publicly traded REITs appearing on the TSX exchange. Since the 1990s recession, Canadian REITs have emerged as the preferred way for many investors to participate in commercial real estate investing.
As such, let's uncover the pros and cons of these investment vehicles for those seeking more commercial real estate in their portfolios.
A Real Estate Investment Trust (REIT) is an investment vehicle that allows individuals or smaller firms to acquire stock in a company in order to buy, sell, manage and develop the property. They are typically differentiated from other options by their large number of investors and that they are required to pay out at least 90% of their profits to their shareholders.
REITs in Canada are popular and important. They make up about 60% of the real estate sector on Canada’s TSX and TSXV exchanges, and 48% of stock listings. The total market cap of the real estate sector is now $103B, an increase of 350% over the last decade.
There are a variety of advantages to investing in REITs.
Perhaps the biggest reason that REITs have become so popular and large is the ease of investing in them. It is essentially like a stock. Invest your money, someone else will invest their time in maintaining and improving the investment. You just check your quarterly statements to ensure the performance trend is aligning with your goals.
Having more capital pooled together in larger deals and more deals can give some investors comfort. There can be some diversification benefits. Though size alone doesn’t necessarily make for better performance of sustainability. Remember Lehman.
This method of partnering up can empower investors to benefit from engaging in larger and more diversified assets, such as shopping centers, offices, and apartment buildings.
REITs are primarily an income investment and can provide ongoing passive income dividends. This bodes well for those who want another stream of income for excess cash they have to invest.
Before investing it is also wise to understand the disadvantages of publicly traded REITs, and how they compare to other choices.
The inclusion of publicly traded REITs on major stock exchanges has done a lot to smooth out dips in the performance of other sectors recently. Yet, it also means exposure to extreme volatility, a change in the investment’s value could occur if investments are not correctly chosen. For most who invest in a REITs, you understand this risk so it’s not as emotional for you, but for someone who didn’t do their homework, volatility can be emotional if the value drops quickly.
Most investors may find they have little clarity on exactly what they are investing in. They don’t really have a vote on individual assets or how they are managed. You don’t know what your money is going to be used for next month. For a savvy investor of REITs lack of clarity may not even top your list of cons since you may not have the time or the expertise to get involved in each decision, hence why you invested in a REIT.
As with other similar vehicles, REITs can come with a lot of layers of fees and admin costs. That can take a sizable bite out of the returns investors actually receive, so understand how costs are handled before investing.
As you are not an actual owner of the underlying property assets, you don’t have control over asset value and improvements, and you don’t have the same level of protection as if you owned the actual bricks and mortar. Thus, know the leaders in control of the REIT.
Publicly traded REITs recently celebrated a notable anniversary. They have performed well more many over the past 10 years. They also have some pros and cons which are different from other real estate investment options. Know the differences, and make sure you are investing with your top priorities in mind.