We have already mentioned Real Estate Income Trusts (REITs), but it’s probably a good idea to go into a little more detail about them.
Image: Duckie Monster / Flickr
As mentioned in the previous article, REITs are one way for investors to invest into the real estate market, without getting directly exposed. REITs are regular public companies, and you can exchange their stock on the TSE. What makes REITs particularly special is that they hold real estate, and they pay out dividends based upon their income from the properties. They are not as risky as other equities – people tend to park their money in real estate when other equities tank – but they still have more risk than bonds.
There are not many Canadian REITs: the Canaccord Adams REIT Review counts only twenty-five. They are, however, doing a lot better than their US equivalents. They are also not income trusts, and will not be liable for paying the increased taxes that Ottawa will levy against income trusts in 2011. In return, they must ensure they only own property in Canada, and less than 5% of their income is allowed to come from non-real estate sources. REITs will also not be running afoul of the rules if they buy shares in other REITs who are directly owning and producing income from real estate properties.
There are several Canadian REITs who are not in full compliance with the rules, so if you are planning on investing, do your homework to make sure you know if they are going to be hit by the new 2011 taxes. Most REITs are either commercial or residential. Residential focused REITs includes traditional properties like apartments, but also includes hotels and retirement homes. The commercial REITs includes office buildings and retail.
Some things to watch out for:
REITs are much more volatile than other stocks, and they do not follow the rest of the market. For instance, in 1990, REITs had a 36% discount relative to fair value. Three years later, they had achieved a 28% premium. When you have money in REITs, it is a good idea to keep a close eye on it.
The good thing about this is that they are doing well right now: 2009 was a great year for Canada’s REITs. Although this means that they are no longer a cheap steal, they are expected to continue growing: most REITs are seeing growing occupancy rates while the rest of the market is seeing declining occupancy. The thing to clearly take away is that the REITs are making smarter decisions than the rest of the market.
So, it might still be a good idea to invest, but be careful! And before you make any decisions, talk to a trusted financial advisor.
Nelson Goulart
Broker of Record with Signature Service GMAC Real Estate
www.ssgmac.ca
