The REIT Stuff: Why real estate investment trusts may be the smart bet for an uncertain 2020

by Clayton Jarvis on 05 Dec 2019

CREW readers who have picked up their copy of this year’s Property Forecast mega-issue will already be familiar with the high level of uncertainty that is expected to hamper both Canada’s housing market and its economy in 2020.

Housing projections remain fluid, and have increased in optimism as 2019 has rolled on, but with the global economy set for further turmoil, it’s fair for investors to question just how much faith to put in the housing market, particularly in high-priced, cash flow-challenged cities where continued appreciation is the only thing making the frequently colossal mortgages worth the risk.

But with rental demand skyrocketing in these same pricey markets, abandoning residential real estate altogether would be foolish. Investing in REITs may be the best way to avoid risk while actually generating significantly higher returns than buying rental properties.

That is not a typo. Investing in the equity version of real estate, like a real estate investment trust, has left investors better off over the last decade than investing in residential property in Toronto.

According to the Teranet-National Bank Home Price Index, the price of Toronto residential properties increased by 127% since the end of 2008. The S&P/TSX Capped REIT Index, which includes dividends, has risen 354% over the same period. The S&P/TSX Composite Real Estate Index, which includes REITs and other similar companies, increased 262%. 

Soaring demand and rent values have been key to the success of REITs in Canada, particularly those involved in the acquisition and management of apartment complexes in major urban centers. A stalled economy may put the brakes on appreciation, but it won’t do much to halt population growth or rental demand, meaning REITS may be the ideal investment for riding out a turbulent year.

Because shares in a REIT are sold like any other stock on the TSX or NYSE, they provide a level of liquidity that properties simply cannot. If the bottom falls out of the economy and there is nothing but buyers’ markets as far as the eye can see, unloading a detached home for a fair price could prove impossible. REIT holdings can be moved far more easily.

The last thing an investor wants during an economic downturn is a portfolio concentrated on one property type or in a single market. REITs, by definition, offer the chance to invest in a variety of properties in multiple communities. Diversification is baked in.

“You [also] don’t have to worry about things like actual maintenance and keeping the property lease up,” said BMO Capital Markets analyst Jenny Ma.

With the snow already flying and landlords wondering if their heating systems will survive the onslaught, that might be the best reason of yet to get into a REIT.

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