Author Topic: Real Estate Investment Trust (REITs) in Canada  (Read 4533 times)

StarswirlTheMustached

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Real Estate Investment Trust (REITs) in Canada
« on: January 07, 2013, 10:09:38 AM »
Okay, so. I know nothing about investment. I have ~50K in bank accounts right now, that's how bad I am, but I do want to start investing. Preferably in safe places-- I don't own any property and will want to have my money still be there in a few years for a down payment.
Can someone tell me about REITs? It _feels_ safer than stocks, though there are signs the overheated Canadian housing market is headed for a correction, especially in the major cities. How do these types of funds do during price corrections?
Real estate in any form seems to me like a good investment for the long haul, but I'm not sure about these sorts of things if I want to invest in real estate myself when we're more settled.

Matt K

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Re: Real Estate Investment Trust (REITs) in Canada
« Reply #1 on: January 07, 2013, 10:39:59 AM »
An REIT is a stock. It is just a stock in a special kind of company. By law, and REIT must return 90% of its profits to the shareholders. It has some other rules pertaining to it, and it gets special tax benefits, but it is a company, and should be thought of like any other stock.

You are also right to worry about what high property values are doing to these stock prices. I also want to own REIT units and did some light investigation into RioCan (one of the largest REITs in Canada). Their stock has gone up considerably since 2008, far more than most, and it is still climbing. They pay out well (twice what my dividened specific ETFs do). But, like you, Im worried that a lot of their value is based on the land value of properties in the big Canadian cities where property values have been increasing (much) faster than wages for more than a decade. RioCan also only invests in retail and office properties. That means that if the retail sector is hit hard, or fundamentally changes due to more online shopping, or just a lot of big walmarts opening up near a riocan properties, the shareholders will feel it.

Personally, Id be much more comfortable with an REIT that invested in apartment complexes (people wont have to shop at the local strip mall, but they will have to live someplace).

Vanguard Canada has an REIT index fund. What this means is that it holds a whole bunch of different REITs. Right now, this would be my choice. You get to invest in REITs without tying yourself to the success/failure of a single one (but if the property markets in Toronto and Vancouver drop, youll still feel it, since all the REITs will be affected). Under Canadian law, a fund cannot publish its returns until it has been running for a year. Unfortunately, Vanguard is brand new to Canada, so we cant see the payouts on this fund yet.

TL;DR version: You are right to worry about the property costs in Canada, and I agree an adjustment is coming; when it does REITs will go down in value. If you are going to go the REIT route, and want to avoid risk, Id go with the Vanguard REIT fund. I would not sink all of your money into that fund however. I would put more of it into another broad index fund (Vanguard has plenty to choose from, as do some of the big banks now, TD and Bank of Montreal specifically).

Matt K

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Re: Real Estate Investment Trust (REITs) in Canada
« Reply #2 on: January 07, 2013, 10:53:20 AM »
I just noticed in your post you said you are thinking of using the money for a down payment in a few years time.

You need to define 'few years'. Generally speaking, the market as a whole (whole market index fund) will rise. MMM likes to use the number of 7% per year. However, this is a long term number. Basically, give it long enough and it evens out the ups and downs to a smooth 7% gain. But in any given year it can jump up or down (2007 / 2008, stocks lost more than 50% of their value, 2012 German stock exchange went up 29% - recovering from a really bad year before). If you need to pull your money out in three years, who is to say that the market won't be at another low point.

So, if you have a specific (near) time frame when you want to pull the money out, stock and funds are a bad idea. Generally, the advice is to invest in GICs (which cannot go down in value, but have minimal returns, such as 2%), or just a high interest savings account (ING Direct Canada's high interest savings account is 1.4% right now). The savings account can be withdrawn from at any time. The GICs have to wait out the term, so if you buy a 2 year GIC, but find your perfect house in 1.5 years, you give up your 2% (you still get your original money back).

The difference between an ING HISA at 1.4% over two years versus a GIC at 2% for $50k is $600. So you are 'paying' (aka: not earning) $600 to have the freedom to remove your money at any time.

ING's rate is also based on interest rates, so it interest rates go up, so does your return. A few years ago my ING account was paying 2.2%. With the GICs, the rate will not go up (but can't go down either) during the 2 year period.
« Last Edit: January 07, 2013, 10:57:27 AM by Matt K »

tooqk4u22

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Re: Real Estate Investment Trust (REITs) in Canada
« Reply #3 on: January 07, 2013, 11:02:16 AM »
Really there is too much to go into in a post but the short answer is no - they are not necessarily safer than stocks but they can play an important role in your overall asset allocation. They provide yield and inflation protection. 

Early on REITs were considered an alternative asset class but that changed in the 2000's when it migrated into part of a accepted asset allocation and returns/yields normalized - now all pension funds and such have at least 5% in real estate. 

REITs typically don't have exposure to owner-occupied housing but a collapse in housing can certainly affect REITs (look at 2008 in the US) but in general they are impacted by the economic climate, employment, sentiment, interest rates, etc. Low interest rates are aiding REITS significantly but the sluggishness of the economy is hurting them.  The good news is that almost all REITs have repaired their balance sheets from the down turn and now they need the economy to do its part.

Here is my current view:
Apartment REITS - richly valued with thin yields, highly dependent on housing staying down and interest rates staying low, and rental rates growing at 5-7% for the foreseeable future.  Something will give here. Personally, there is more downside than upside with apartment REITs right now.

Industrial REITS - probably safest spot but like apartments a bit pricey, although this space has yet to see any big growth in rents since the downturn so it may not be that pricey if economic conditions improve.  Low cost to carry, spending is picking up and online spending helps this category so leasing/occupancies/rents may improve but in any event shouldn't decline.

Retail REITS - still tough because of low spending and online competition.  Class A centers/malls will remain strong but others may be tough and you will see this in the valuations between REITs operating at the different ends of the spectrum.

Office REITs - really tough.....one word "Unemployment".  If there are no jobs there is no need for office space.  Furthermore, tenants have become more efficient in its space needs and employing more flexible work options which all means less space needs.  A good rule of thumb used to be that 1 employee transalted to 250 square feet of lease space and now it might be 200.  Office is also the most capital intensive of all categories. The only argument I could make for Office REITS is that because it is the most unliked class right now and if you think employment (professional) will improve dramatically then this would be a good speculative bet that pays an ok dividend to wait.

Best advice would be to invest through an index fund, but you get the good with the bad, and keep it as part of your broader strategy - at least 5% but personally I would be ok with 25% but not in an index.  Most people don't have the eduation to invest in stocks and even fewer have the knowledge to invest in REITS - it is a completely different animal. 

aclarridge

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Re: Real Estate Investment Trust (REITs) in Canada
« Reply #4 on: January 07, 2013, 11:13:56 AM »
You are right to worry about the property costs in Canada, and I agree an adjustment is coming; when it does REITs will go down in value. If you are going to go the REIT route, and want to avoid risk, Id go with the Vanguard REIT fund. I would not sink all of your money into that fund however. I would put more of it into another broad index fund (Vanguard has plenty to choose from, as do some of the big banks now, TD and Bank of Montreal specifically).

What about the Vanguard US REIT (VNQ)? Wouldn't you prefer it?

StarswirlTheMustached

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Re: Real Estate Investment Trust (REITs) in Canada
« Reply #5 on: January 07, 2013, 11:23:06 AM »
Thanks, all. I didn't know Vanguard index funds were available in Canada; that's good to know.

When you discuss the different types of real estate, what about farmland REITs? Do such things exist? Rural property doesn't seem (nearly as) overvalued right now, (except near population centers where it's transitioning from being rural) and I can't even imagine an economic climate where the demand for food, and thus farmland, drops-- at least not one where any other investments take as big of a hit, too.

I just noticed in your post you said you are thinking of using the money for a down payment in a few years time.

You need to define 'few years'.
Certainly no less than four, likely not less than six, hopefully no more than ten. My better half working on her PhD, and we'll be buying property once she's done AND we finally both find steady jobs in the same city. That's the plan, anyway.
 I had though about flipping a property for a live-in-rental since I'll be here for the next 4 years, but with rumblings of "market correction" on the horizon, I don't want to be caught holding the bag when I need to sell. (Though in a hard-to-build-in town with a resource-sector jobs base, we might not feel it much, here. And I guess I could turn absentee landlord?)
... I did say I had no idea what I'm doing, right?

aclarridge

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Re: Real Estate Investment Trust (REITs) in Canada
« Reply #6 on: January 07, 2013, 11:43:40 AM »
ING Direct Canada's high interest savings account is 1.4% right now

I recommend Canadian Tire Financial Services (I know, it sounds weird) - their rate is 1.7% currently for a savings account and 2% for a TFSA. Customer service has been good to me. They modify their rate periodically as well, but it's consistently better than ING's rate I believe. You can link it to your bank account and do transfers online.

Accounts are eligible for CDIC insurance too.

StarswirlTheMustached

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Re: Real Estate Investment Trust (REITs) in Canada
« Reply #7 on: January 07, 2013, 12:21:57 PM »
ING Direct Canada's high interest savings account is 1.4% right now

I recommend Canadian Tire Financial Services (I know, it sounds weird) - their rate is 1.7% currently for a savings account and 2% for a TFSA. Customer service has been good to me. They modify their rate periodically as well, but it's consistently better than ING's rate I believe. You can link it to your bank account and do transfers online.

Accounts are eligible for CDIC insurance too.
Peoples Trust Company has a 1.9% interest rate on their e-savings account, and 3% on a TFSA.
I know it sounds too good to be true, but I've been with them for a couple years now (admittedly, I started at over 2% on my savings account, but even ING had 2%, then). Even 3% has a hard time keeping up with inflation, though.
Is (say) six years a long enough time to make it reasonable to invest in the market with better returns than that, or should I play it safe and stay in banks?

StarswirlTheMustached

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Re: Real Estate Investment Trust (REITs) in Canada
« Reply #8 on: May 21, 2013, 05:38:34 PM »
I had though about flipping a property for a live-in-rental since I'll be here for the next 4 years, but with rumblings of "market correction" on the horizon, I don't want to be caught holding the bag when I need to sell. (Though in a hard-to-build-in town with a resource-sector jobs base, we might not feel it much, here. And I guess I could turn absentee landlord?)
... I did say I had no idea what I'm doing, right?
... and rent-able properties have jumped hugely in price and started selling (even more) like hotcakes in the past year. I just want to get on record that still don't know what I'm doing, and you can't out guess the market. I kick myself. (now the market is starting to look too overheated to jump into. damnit. I'll just tell myself that the bubble is always biggest before it bursts.)

daverobev

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Re: Real Estate Investment Trust (REITs) in Canada
« Reply #9 on: May 22, 2013, 06:55:10 AM »
I had though about flipping a property for a live-in-rental since I'll be here for the next 4 years, but with rumblings of "market correction" on the horizon, I don't want to be caught holding the bag when I need to sell. (Though in a hard-to-build-in town with a resource-sector jobs base, we might not feel it much, here. And I guess I could turn absentee landlord?)
... I did say I had no idea what I'm doing, right?
... and rent-able properties have jumped hugely in price and started selling (even more) like hotcakes in the past year. I just want to get on record that still don't know what I'm doing, and you can't out guess the market. I kick myself. (now the market is starting to look too overheated to jump into. damnit. I'll just tell myself that the bubble is always biggest before it bursts.)

Ok, so the point of a diversified portfolio is so that volatility is reduced. Canada is a problem in that the TSX is not well diversified - 30+% financial companies, and the same raw materials, energy etc. Look at the sector allocation.

Have a read of Canadian Couch Potato, if you haven't already. If you are still saving for a downpayment - fine. Don't invest money in the stock market you can't be without in 5 years, and that you can't afford to lose. After 5 years, chances of getting your money back are better.

Maybe do a split. Put 1/2 or 3/4 of your money in a People's Trust TFSA (as much as you can), put the rest in a basic couch potato portfolio - have a look at the TD eSeries stuff. Rebalance every year, and ignore it the rest of the time (except for making contributions).

tooqk4u22

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Re: Real Estate Investment Trust (REITs) in Canada
« Reply #10 on: May 22, 2013, 12:55:16 PM »
Ok, so the point of a diversified portfolio is so that volatility is reduced. Canada is a problem in that the TSX is not well diversified - 30+% financial companies, and the same raw materials, energy etc. Look at the sector allocation.

Think about a scenario where raw materials lose demand/decline in value (low growth environment) - there goes a large chunk of the market, and guess what happens to the other large chunk - ouch.