Real Estate Investment Trusts: Are They Worth the Investment?

This article was originally published in French on Droit-Inc. and has been reproduced with permission.

Investing in real estate tends to be a profitable decision for investors that can hold out for longer term yields. Achieving this however, normally requires an investors’ attention to the property. In order to ensure a property returns a profit, proper management is crucial. Investing directly in a property requires an investor who has the time, energy and skills to ensure that vacant spaces are filled with quality tenants paying reasonable rents, that financing is negotiated at optimal interest rates, that rent is collected to manage operating costs and more. The average investor who may be a lawyer, doctor or business-owner could find this level of expertise and time commitment overwhelming.

Enter the concept of a real estate investment trust, aka, REIT. The concept was originally introduced in the United States in the 1960s to provide individual investors with the opportunity to participate in different sectors of the real estate market. The reason why a REIT is attractive to the average investor is because income earned by a REIT flows through to its unit holders without being taxed at the REIT level, giving regular investors similar flow-through income to that enjoyed by direct owners of commercial property.

REITs work in a similar manner to mutual funds. Investors in REITs get the benefit of investing in a diverse portfolio of real estate assets all the while enjoying the advantages of professional management skills. What’s more, is that most management of REITs have a meaningful ownership stake in their REITs, thereby attesting that personal objectives are aligned with the success of the business. Also, REITs are required to distribute virtually all distributable income to unit holders on a regular basis, say monthly or quarterly (usually with a tax-deferred component) ensuring that investors regularly see returns on their initial investments, plus the investor has the opportunity to realize capital appreciation should the properties increase in value (although this would depend of course on the longevity of the investment hold amongst other factors).

In Canada, investing in publicly accountable REITs are attractive at the moment for various reasons. First of all, most if not all REITs are currently undervalued. There are some key performance indicators that are common lingo in this sector and Net Asset Value (NAV) is one of them. REITs have been trading at a large discount to NAV over the past few months, where historically they have traded on par (or slightly higher) than NAV. The outlook for the REIT market is very positive considering the bargain. Long-term interest rates are not expected to rise significantly in Canada, cap rates are likely to remain stable and established REITs seem to have healthy financial positions and reasonable payout ratios. This means that investing in Canadian REITs right now would be a very good buy!

Contact Jo-Ann Lempert, FCPA, FCA at 514.861.9724 or [email protected].