REITs in Canada are celebrating their 30th anniversary in 2023. REITs are an investment tool that lets people invest in real estate without managing the properties. They are popular in Canada because of their diversification and steady income potential.
REITs have faced skepticism from investors, but they have become an essential part of the Canadian investment landscape over time. One benefit of REITs is their capacity to generate steady income. As they own and manage income-producing properties, they are able to distribute a significant portion of their earnings to investors through dividends. This has made them popular with those looking for a dependable income source.
REITs also offer diversification potential, allowing investors to gain exposure to various properties, including office buildings, retail spaces, and industrial properties. This helps spread risks across different real estate types, mitigating the impact of any one property’s performance.
However, like any investment, REITs come with risks. One significant risk is the impact of interest rates on property values. Higher interest rates make borrowing more expensive, lowering property values and decreasing income. REITs are also subject to other real estate investment risks, such as changes in the local economy, zoning laws, and tenant turnover. COVID also impacted REITs that rely on office tenancy. Nevertheless, REITs provided rent relief and other support to their tenants to weather the pandemic. Some REITs have also focused on properties better suited to the post-pandemic world, such as logistics and warehousing facilities.
Despite these risks, REITs have delivered a 9.6% average annual total return since inception in 1993, according to the National Bank of Canada’s report. This is higher than the 6.8% average annual total return for the S&P/TSX Composite Index over the same period. Looking forward, REITs are likely to continue being attractive to income-seeking investors. The Canadian real estate market remains strong, with demand for commercial properties in major cities, such as Toronto and Vancouver, expected to continue growing. REITs can provide a hedge against inflation, as in most cases rental rates can be raised to keep pace with inflation.
Additionally, some REITs may offer potential for capital appreciation, as property values increase over time. In addition to the 9.6% average annual total return since inception, the Canadian REIT sector has also shown strong dividend growth, with a 5-year dividend growth rate of 5.1%, according to data from Bloomberg. Furthermore, the sector has historically traded at a discount to its net asset value (NAV), presenting opportunities for investors to buy at a discount and potentially benefit from price appreciation as the market corrects. Finally, the sector has a low correlation to other asset classes, making it a valuable addition to a well-diversified investment portfolio.
In conclusion, the 30th anniversary of REITs in Canada is an opportunity to reflect on their ups and downs. While there have been challenges, they have proven reliable for income and diversification. As the Canadian real estate market continues evolving, REITs are expected to remain a popular investment option for years to come.nt option for years to come.