Real Estate Investment Trust (REIT) in Canada

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REITs allow you to invest in real estate without the hassle of owning a home. There are many variations, including stocks, ETFs and mutual funds. These options allow you to invest for as little as one dollar, with no upkeep of a physical property required.

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A real estate investment trust (REIT) is a real estate company that buys and manages properties using money from investors, with the REIT then distributing income back to investors. This could include residential properties, offices, shopping malls, industrial buildings, and healthcare buildings.

Many REITs in Canada are publicly traded on the Toronto Stock Exchange, which means that you can buy them just like you would buy a stock. REITs on the Toronto Stock Exchange are income trusts, which means that shares are called units, with the REIT required to distribute most of their income to unitholders.

That's why most REITs traded on the TSX have a ticker symbol that includes. UN or -UN as you're buying a unit of the REIT. Since income goes directly to unitholders, REITs do not pay any corporate income tax themselves. However, you will need to pay capital gains tax if you are holding your unit outside of a registered account, such as a TFSA. Not all REITs are publicly traded. Private real estate investment trusts are only open to accredited investors or eligible investors.

Smartcentres REIT

SmartCentres Real Estate Investment Trust (SRU.UN) is based out of Vaughan, Ontario. The REIT was founded in 1994 and had over 300 employees in 2016. They specialize in retail property, especially big-box malls. Investing in Smartcentres means they will handle the Ontario eviction process while you relax and collect dividends. Almost all SmartCentre locations have Walmart as an anchor tenant.

H&R REIT

H&R Real Estate Investment Trust (HR.UN) is Canada’s third-largest REIT. The company is based out of Toronto, Ontario, specializing in commercial real estate. H&R owns 40 office buildings, 161 retail locations, 105 industrial properties, and 11 other investments.

Riocan REIT

RioCan Real Estate Investment Trust (REI.UN) is Canada’s second-largest REIT. The company primarily owns supermarkets, and neighbourhood convenience shopping centers. To diversify their tenants, RioCan ensures no company makes up more than 10% of its rental revenue.

Artis REIT

Artis Real Estate Investment Trust (ARY.UN) is Canada’s largest diversified REIT. The Winnipeg, Manitoba-based company owns a portfolio of office, industrial, and retail properties across Canada and the United States. In September 2021, the REIT owned 171 commercial properties.

Granite REIT

Granite Real Estate Investment Trust (GRT.UN) is based out of Toronto, Ontario. The company was formally created after a spin-off from Magna Group. Granite specializes in multi-residential apartment buildings across North America and Europe. The trust focuses on e-commerce and distribution properties.

The table below shows the top 34 Canadian REITs traded on the Toronto Stock Exchange and one REIT on the TSX Venture Exchange. This list of REITs also shows their share price, market capitalization, dividend yield, and 5-year return as of August 23, 2021.

It’s always a good idea to diversify your portfolio, so it would be best to invest in more than one REIT. If you do have to choose just one REIT, you might want to consider characteristics such as their size, portfolio, dividends/distributions, and stock price appreciation.

For example, 20 Canadian REITs have a market capitalization of over $1 billion. Of these 20 REITs, 12 of them had a positive return over the past five years based on their stock price appreciation.

REIT investors will also want to consider the dividends that the REIT pays, which is called their distributions. The distribution yield of a REIT can more than make up for a stock price that has decreased. For example, SmartCentres (SRU.UN) saw its share price fall 18% over the past five years.

However, they also had a large dividend yield, at 6.15%. When accounting for distributions from dividends, the total return over the past five years would be 4.83%. If these dividends were reinvested into more SmartCentres REIT shares, the total return over the same 5-year period would be 10.17%.

For some REITs, most of an investor’s return might be through the REIT’s dividend distributions rather than from stock price growth. Inovalis REIT (INO.UN) saw virtually no change in its stock price if you were to purchase precisely five years ago and sell today. On August 19, 2016, the stock price of INO.UN was $9.58. Five years later, on August 20, 2021, the stock price was $9.56.

While there were large fluctuations in Inovalis' stock price between these two points, an investor bought and held INO.UN shares would have had no gains based on price alone. Instead, Inovalis pays out a hefty dividend yield of 8.58% per year. When accounting for these dividend distributions, an investor would have a total return of 46.58% just on dividends alone. If these dividends were reinvested, the total return would have been 59.74% after five years, even though the stock price did not change.

Finally, the portfolio of a REIT is an essential aspect that investors should look at carefully. REITs usually focus on a specific property type, such as retail or residential. Investing only in retail REITs can expose you to risks, such as the retail sector performing especially poorly, as was seen in 2020. Types of REITs include:

Residential REITs

A portfolio for a Residential REIT might include high-rise, mid-rise, and low-rise apartment buildings, multi-unit rental properties, and single-family rental homes. Canadian Apartment Properties REIT (CAR.UN) is Canada’s largest REIT and owns more than 57,743 units in Canada, with an average monthly rent per unit of $1,282 in 2020.

Commercial REITs

Commercial REITs are also known as Diversified REITs. Commercial REITs will include office buildings, industrial buildings, warehouses, hotels, multifamily residential, and retail. These properties all have tenants that generate income and will usually have more extended lease contracts than residential properties.

H&R REIT (HR.UN) is one of the largest REITs in Canada and invests in commercial properties. 38% of H&R's portfolio is offices, 31% retail, 8% industrial, and 23% residential rentals.

Retail REITs

Retail falls under commercial property, but some REITs focus exclusively on retail. Types of retail property that a retail REIT might own include shopping malls, strip malls, retail plazas, big box stores, and single-tenant properties. RioCan (REI.UN) is the second-largest REIT in Canada and has a significant retail portfolio.

RioCan’s retail tenants include Loblaws, Canadian Tire, Walmart, Shoppers Drug Mart, Tim Hortons, TD, and BMO. Some REITs may even focus on specific tenants. For example, Slate Grocery REIT (SGR.UN) focuses on grocery-anchored real estate, while CT REIT (CRT.UN) leases mainly to Canadian Tire.

Office REITs

Office REITs own office buildings that they then lease out to tenants. Allied Properties REIT (AP.UN) owns 200 office buildings in Canada.

Dream Office REIT (D.UN) has an extensive collection of office space and owns a few unique properties, such as the Distillery District and the Canary District in Toronto, and the upcoming Zibi development in Ottawa/Gatineau.

Industrial REITs

Industrial REITs, such as Granite Real Estate (GRT.UN), have been among the best-performing REITs in Canada over the past five years. An industrial REIT might own industrial properties including factories, manufacturing, warehouses, logistics, and storage buildings.

Granite REIT's portfolio includes 71% distribution and e-commerce, 17% special purpose buildings, 11% warehouses, and 1% flex/offices.

Healthcare REITs

There are only two Healthcare REITs in Canada: NorthWest Health and Chartwell Retirement Residences. NorthWest Healthcare owns medical office buildings, medical clinics, health centres, and other spaces for health services. Chartwell owns retirement homes and long-term care homes.

Exchange-traded funds (ETFs) are just like mutual funds, where they have a portfolio of different stocks under a specific theme. For example, the SPDR S&P 500 Trust ETF is an ETF that follows the S&P 500 index. The main difference between ETFs and mutual funds is that ETFs are publicly traded on a stock exchange. This means that you can buy ETFs as easily as buying a stock.

REIT ETFs are ETFs that are composed of REITs. The main benefit of REITs is that you can diversify your investments without making multiple trades yourself. ETFs are also managed and can rebalance investment holdings. Instead of investing in a single REIT, a purchase of a REIT ETF allows you to be invested in multiple REITs at once. This diversifies your real estate investment portfolio, spreading risk should one REIT fail.

There are plenty of REIT ETFs traded on the Toronto Stock Exchange. Some Canadian REIT ETFs include:

Data as of August 23, 2021

Invesco S&P/TSX REIT Income Index ETF (TSX: REIT)

The Invesco REIT Income Index is an ETF that follows the S&P/TSX Capped REIT Income Index. This index tracks 19 Canadian REITs that pay dividends and rebalances twice a year in January and July. The index's holdings are based on the REIT's risk-adjusted dividend yield. The higher the REIT's dividend yield, the more weight is placed on that REIT. Over the past three years, Invesco REIT ETF returned 24%. The ETF’s dividend yield is 3.847%.

BMO Equal Weight REITs Index ETF (TSX: ZRE)

BMO’s REIT ETF follows the Solactive Equal Weight Canada REIT Index. This index puts equal weight on 22 REITs. For example, WPT Industrial REIT (WIR.U) makes up 5.80% of the index, Boardwalk REIT (BEI.U) makes up 4.76% of the index, and Choice Properties (CHP.U) makes up 4.42% of the index. Over the past five years, BMO’s REIT ETF had a return of 36.5%, with a dividend yield of 3.716% annually. BMO charges a maximum annual management fee of 0.55%, for a management expense ratio (MER) of 0.61%

Vanguard FTSE Canadian Capped REIT Index ETF (TSX: VRE)

Vanguard’s REIT ETF follows the FTSE Canada All Cap Real Estate Capped 25% Index, which is mainly composed of REITs, with 25% being stocks of real estate companies. For example, FirstService Corporation makes up 13%, and Colliers International Group makes up 7.5%. This allows the index to follow small-cap, mid-cap, and large-cap real estate stocks and REITs.Over the past five years, VRE had a return of 45%, with a dividend yield of 2.89%. Vanguard charges an MER of 0.38%.

iShares S&P/TSX Capped REIT Index ETF (TSX: XRE)

iShare’s Capped REIT ETF follows the iShares S&P/TSX Capped REIT Index ETF, which limits any individual REIT to a maximum of 25% of the ETF’s portfolio. The largest holding is Canadian Apartment Properties REIT, which makes up 15%, followed by RioCan at 10%. Over the past five years, XRE had a return of 23%, with a dividend yield of 2.775%. Including dividend distributions, the total 5-year return was 46%. iShares charges an MER of 0.61%.

CI Canadian REIT ETF (TSX: RIT)

CI Global Asset Management's ETF is an actively managed ETF that invests in REITs, REOCs (real estate operating corporations), and real estate companies. For example, the ETF also invests 5% in shares of Tricon Residential, a rental housing company. Over the past five years, RIT had a return of 30%, with a dividend yield of 4.02%. CI charges an MER of 0.86%.

Harvest Global REIT Leaders Income ETF (TSX: HGR)

For exposure outside of Canada, Harvest Global REIT ETF comprises REITs and REOCs from around the world. The most significant geographic allocation is the United States, with 65.6% weighting, Australia at 10.6%, the United Kingdom at 5.5%, and Singapore at 5.4%. HGR invests in various REITs, including hotel and resort REITs, mortgage REITs, and specialized REITs, such as telecommunications infrastructure. Mortgage REITs purchase mortgages and mortgage-backed securities (MBS). Higher mortgage rates, a trend seen throughout Canada in 2022, will increase the yield of mortgage REITs. The ETF aims to also generate income by using a covered call strategy. The ETF will write covered call options to generate income, which helps to boost the ETF's dividend yield. Over the past five years, HGR returned just 0.3%, with a dividend yield of 5.61%. HGR’s total 5-year return was 22% when accounting for dividend distributions. HGR charges an MER of 1.36%.

A few mutual funds in Canada are made up of only REITs or real estate companies. Some mutual funds require a minimum initial investment, ranging from $100 to $500. Mutual funds usually have a lower minimum investment requirement for subsequent investments. A significant disadvantage of mutual funds is their higher annual management fees. ETFs offer lower fees and are easier to enter and exit. Some examples of Canadian REIT mutual funds include:

CIBC Canadian Real Estate Fund

CIBC’s Canadian Real Estate Mutual Fund invests primarily in Canadian REITs and in some real estate companies, such as Sienna Senior Living and FirstService Corp. Over five years from 2016 to 2020, this mutual fund’s net asset value (NAV) per unit increased by 5%. CIBC's Class A mutual fund charges an annual management fee of 2%, while CIBC's low-fee Class F mutual fund charges a yearly management fee of 1%.

Fidelity Global Real Estate Fund

Fidelity's real estate mutual fund invests in REITs and real estate companies from around the world. The largest holding is Prologis at 8.12%, Digital Realty Trust at 4.66% and Duke Realty at 3.72%. Over the past five years, the mutual fund returned 30.4%, with an MER of 2.02% to 2.31%. Along with trading expense fees, the annual fees for the mutual fund ranges from 2.12% to 2.41%.

Canada Life Global Real Estate Fund

Canada Life's real estate mutual fund holds REITs worldwide, with roughly 25% in real estate companies. Canada Life charges an annual management fee ranging from 0.80% to 2.00% depending on your mutual fund series, with an administration fee ranging from 0.15% to 0.28% annually.