Top 10 Canadian REITs

Real Estate Investment Trusts (REITs) have existed in Canada for 30 years. Over this time, they have produced dividend aristocrats — funds that consistently increase payouts to shareholders year after year. An attractive aspect for investors is that in 2007, the government exempted these funds from paying income tax. Additionally, REITs are exempt from the Specified Investment Flow-Through (SIFT) tax on investment income, a tax imposed on all publicly traded income funds in Canada since 2011. We will delve into how Canadian real estate investment trusts operate, the returns they offer their investors, and which are considered the best. 

• REITs Structure
• How REITs in Canada Work
• Top 10 REIT Investment Funds in Canada

REITs Structure

Real Estate Investment Trusts in their modern form emerged in the USA during the 1960s under Eisenhower's leadership. He proposed a mechanism allowing investors to put money into diversified property portfolios, earning profits through buying and selling securities, similar to other assets.

This gave rise to REITs, companies that attract investor funds for construction, acquisition, and property management, then distribute the income among the shareholders. Here are the requirements for real estate investment funds in most countries: 

1. A taxable organisational structure (non-profit associations or charitable funds cannot engage in such activities).
2. At least 75% of the company's income must come from real estate: sales, leases, including short-term ones, and interest from mortgaged properties. Another 20% of REIT income can originate from mortgage interests or bank deposits. All other income should not exceed 5%.
3. No less than 90% of the REIT's income from operations must be distributed as dividends to shareholders. There should be a minimum of 100 shareholders, and the control package of shares cannot be concentrated in the hands of five or fewer individuals, to avoid a majority minority situation. 

Real estate investment funds in most countries do not pay income tax on distributed dividends, though eventually, each shareholder will need to pay taxes on their profits. REITs only incur corporate tax on the remaining 10% of profits. This allows REITs to provide high returns, up to 11-18% annually in different countries.

The format of investment funds is convenient as it allows shareholders to earn from real estate without owning individual properties or being involved in their management. In other words, shareholders do not need to monitor the property's condition, search for tenants, or deal with them. There are other significant advantages: 

1. Shares of investment funds are more liquid than actual properties. Selling them is quicker compared to a property that requires finding a buyer and completing a transaction. 
2. Only the necessary amount of shares can be sold off. For instance, an investor buys an apartment in Toronto worth $2.7 million and later needs $1 million in cash. In such a scenario, the only option is to sell the property to take the required amount and then search for another property for the remaining sum. The entire process could take months, whereas shares of an investment fund can be sold at any time and repurchased later. 
3. REITs significantly reduce the entry barrier into the market. One can start investing with any amount, even $100. 
4. Fund assets are diversified, better protected against inflation, and free from risks associated with a particular property encountering issues. 

Currently, real estate investment funds operate in 38 countries, including the G7 nations: Canada, France, Germany, Italy, Japan, the UK, and the USA. Funds also exist in Australia, the United Arab Emirates, Thailand, Hungary, Spain, and other countries.

How REITs in Canada Work

There are 34 Canadian REITs in the list of the Toronto Stock Exchange (TSX), with 20 having a market capitalisation exceeding $1 billion. Investment funds vary by the sectors they invest in and manage on behalf of shareholders: 

1. Residential real estate: multi-family homes rented on long-term leases, suburban communities with houses and villas for rent, worker accommodations.
2. Office real estate: business centres and adjacent areas.
3. Retail: properties for retail trade, including street retail spaces, shopping centres, and supermarkets.
4. Hospitality: hotels, motels, countryside resort properties, apartments for short-term lease under professional management.
5. Logistics hubs: warehouses, server facilities, self-storage projects, port storage.
6. Healthcare: clinics, hospitals, nursing homes, office buildings of medical centres, and medical labs.
7. Education: student campuses, schools, and university buildings.
8. Diversified funds: funds that can manage various types of real estate simultaneously.

Foreigners can invest in Canadian REITs through accredited brokers and global stock exchanges. However, non-residents cannot own more than 49% of shares in an individual investment fund.

For decades, Canada's real estate market has been among the most stable globally. However, the crisis triggered by the 2020 pandemic introduced significant fluctuations.

Initially, demand for several property categories (especially offices, small apartments for expatriates working in Canada, and secondary housing) sharply declined before soaring to historic highs, driving prices up. 

According to Desjardins, in February 2022, average residential property prices hit record levels at $816,720 CAD ($591,012 USD). Subsequently, the market stagnated due to reduced demand, as most Canadians could not afford properties at those prices. This was followed by a sharp decline. In some provinces, such as British Columbia, prices plummeted by 47%. At the same time, prices dropped in Toronto, but less significantly — by 9.2%.

Experts cautiously note that the unprecedented pandemic crisis is likely to be over. While residential property buyers remain cautious, according to the RBC analytical company, the market is warming up again due to the resumption of immigration programmes and an influx of new expatriates to Canada. 

The construction sector is also picking up momentum: post-pandemic years witnessed a 15-20% increase in housing output, reaching around 220,000 units per year. However, RBC experts highlight that to meet the demand caused by the rising number of households, a minimum of 270,000 housing units per year (apartments, suites, and houses) will be needed by 2025. Projections indicate that Canada's real estate market will grow by 4.06% between 2023 and 2028, reaching a volume of $9.54 trillion.

Amid this backdrop, the investment metrics of diversified REIT funds, managing various properties across different Canadian regions and even countries, remain the most stable. Additionally, funds engaged in building housing for long-term lease remain resilient. Buying property in Canada is often unattainable for most households, thereby maintaining sustained demand for long-term rentals. 

Moreover, those investors who are not ready to invest in specific Canadian REITs can purchase ETF format shares on stock markets, diversifying investment

Top 10 REIT Investment Funds in Canada

CAPREIT: Canadian Apartment Properties REIT

Dividend Aristocrat
Ticker: CAR.UN
Market Capitalisation: $7.733 billion
Dividend Yield (FY): 3.17%

Founded in 1996 by Thomas Schwartz and Michael Stein, initially as a private fund, CAPREIT attained public status in 1997 and started trading on public exchanges. Today, it stands as Canada's largest residential real estate landlord, with the Montreal Olympic Village acquired for $176.5 million in 2012 forming part of the company’s portfolio.

As of 2022, CAPREIT wholly owns or holds shares in approximately 67,000 residential multi-family units, townhouses, and commercial residential properties (hotels and apartments) across Canada, the Netherlands, and Ireland. The fund's total assets exceed $17.7 billion, employing over 28,000 staff.

CAPREIT attracts investors with a high-quality diversified portfolio, encompassing residential properties of various segments (both affordable and upscale), land parcels near major cities, and industrial properties. 

SmartCentres REIT

Dividend Aristocrat
Ticker: SRU.UN
Market Capitalisation: $4.019 billion
Dividend Yield (FY): 7.84%

Founded in 1994 by Canadian billionaire Mitchell Goldhar, SmartCentres REIT is based in Vaughan, Ontario. Specialising in retail real estate, particularly in shopping centres, the REIT counts the American retail giant of wholesale and retail trade Walmart as its anchor tenant. By 2016, SmartCentres REIT had grown to employ 300 people, with 72% of its real estate portfolio under the Walmart brand. 

However, the top management of SmartCentres REIT decided not to rest on its laurels and diversified its investment portfolio. The company notably stands as one of the major investors in the development of the Vaughan Metropolitan Centre. This is a new global business district, including a modern bus terminal, a subway station, eight residential towers, two office towers, along with a dozen planned residential and commercial buildings, park systems, and retail spaces. 

It is anticipated that by 2031, a minimum of 25,000 people will reside in the new city centre, while 11,000 will work there.

Granite REIT

Dividend Aristocrat
Ticker: GRT.UN
Market Capitalisation: $4.269 billion
Dividend Yield (FY): 4.78%

As a subsidiary of Magna International, one of the world's largest automotive parts manufacturers, Granite REIT serves as the primary lessor and manager for Magna's industrial, office, and warehouse properties.

This positioning makes Granite REIT a stable and reliable fund with a substantial capitalisation and a diversified portfolio comprising manufacturing facilities, logistics centres, and corporate offices within Canada as well as in the United States, Austria, and Europe. 

However, only 60% of Granite REIT's income is derived from managing real estate assets occupied by the Magna conglomerate. The remaining 40% come from various industrial, transportation, and retail companies. 

InterRent REIT

Dividend Aristocrat
Ticker: IIP.UN
Market Capitalisation: $1.785 billion
Dividend Yield (FY): 2.96%

InterRent REIT owns over 12,000 apartments and condominium units across Ontario, Quebec, Ottawa, Gatineau, Toronto, and Hamilton. It has been operating successfully since 2006, doubling its portfolio from 2009 to 2017. The company’s strategy involves acquiring residential complexes in prime locations but with low tenant ratings due to poor management and poor living conditions.

Significantly investing in the modernisation and refurbishment of these condominiums, InterRent REIT completely revamps the apartment interiors, furniture, appliances, and improves the overall service quality and infrastructure for residents. Subsequently, they increase rental rates and attract new tenants, with no shortage of demand, given that homeownership remains unattainable for many young Canadians, and the country sees a continuous influx of immigrants. 

Garnering significant trust among tenants, the fund implements various energy and water-saving systems, focuses on reducing harmful emissions, and modernises waste management. Renting an apartment from InterRent REIT is considered both financially advantageous and prestigious, thereby ensuring investors receive a consistent income.

CT REIT

Dividend Aristocrat
Ticker: CRT.UN
Market Capitalisation: $3.281 billion
Dividend Yield (FY): 6.44%

CT Real Estate Investment Trust is an investment fund that owns mixed-use commercial real estate. The company's portfolio encompasses over 370 buildings situated in major and mid-sized cities across various Canadian provinces, covering a combined area of 29 million square feet (2.7 million square metres).

CT REIT leases spaces for long-term to various retail companies and provides comprehensive building management services while ensuring the proper technical condition of all systems. 

The selection of properties with prime locations i.e., high foot traffic, ample parking, or near convenient transportation hubs, has allowed CT REIT to maintain its position as one of the largest REITs in Canada for many years. 

Allied Properties REIT

Dividend Aristocrat
Ticker: AP.UN
Market Capitalisation: $2.363 billion
Dividend Yield (FY): 10.64%

The company owns office buildings in Calgary, Edmonton, Kitchener, Montreal, Ottawa, Toronto, and Vancouver. It repurposes early 20th-century industrial properties into modern, comfortable work lofts that attract tenants in the creative industries, IT, science, education, fashion, art, and other intellectual sectors. 

The Allied Properties REIT also constructs new office and retail spaces and acts as a developer for trendy urban spaces for work, cultural initiatives, and retail. The mission of Allied Properties REIT revolves around fostering a sense of community among city residents and creating productive business communities.

Despite the significant blow dealt by the pandemic to all office and retail real estate, Allied Properties REIT remained among the market leaders. Although the company experienced noticeable drops in market capitalisation and share prices, it is now showing signs of growth again. Its founder, Michael Emory, is confident that Allied Properties REIT's responsible approach will yield positive results in the long run.

Killam Apartment REIT

Dividend Aristocrat
Ticker: KMP.UN
Market Capitalisation: $2.061 billion
Dividend Yield (FY): 4.00%

Killam Apartment REIT has been in operation since 2002 and owns 165 income properties in New Brunswick, Newfoundland, Nova Scotia, Prince Edward Island, and Ontario. While being relatively small, the fund has already established itself as a reliable partner for both investors and private renters in the market.

Killam Apartment REIT's mission is to provide residents with the most comfortable, modern, and secure accommodation where they do not need to worry about household matters. Condominiums managed by Killam Apartment REIT offer round-the-clock staff support, free laundry facilities, inclusive hot water and heating in rent, secure parking, and perimeter video surveillance. 

Crucially, Killam Apartment REIT's portfolio includes properties in rural areas, along with affordable units for single tenants and young couples. These categories are highly sought after by immigrants arriving in Canada through immigration programmes. 

H&R REIT

Ticker: HR.UN
Market Capitalisation: $2.341 billion
Dividend Yield (FY): 6.72%

H&R Real Estate Investment Trust was founded in Toronto in 1996 by Thomas J. Hofstedter, initially starting with office buildings owned by his affluent and religious family. 

Moving ahead, H&R REIT ventured into constructing new large office complexes, notably taking on the construction of the headquarters for the Canadian oil giant Encana in 2007. 

For a while, H&R REIT even owned one-third of the Scotia Plaza skyscraper in Toronto, housing the eponymous Canadian bank on 24 out of 68 floors. The company adeptly handled the building's management before lucratively selling its stake, diversifying its portfolio by investing capital in several other commercial properties across the country.

Presently, H&R vies for the title of Canada's largest diversified REIT: 23% of the company's assets are multi-residential properties, 28% are retail spaces, 41% are office properties, and 8% are industrial buildings. 

Choice Properties REIT

Ticker: CHP.UN
Market Capitalisation: $9.552 billion
Dividend Yield (FY): 5.68%

Formed in 2012, Choice Properties REIT emerged after the Canadian retail company Loblaw (specialising in supermarkets, pharmacies, and clothing stores) allocated a portion of its assets into a public investment fund, specifically, 426 buildings valued at $7 billion.

Over a decade of active operations and market expansion, Choice Properties REIT significantly expanded. Its portfolio now boasts 752 buildings with a market value of $16 billion. 

Presently, the company is engaged in redeveloping its own sites and old buildings along the Golden Mile in Scarborough and within the business centre in Toronto.

NorthWest Health REIT

Ticker: NWH.UN
Market Capitalisation: $1.072 billion
Dividend Yield (FY): 8.14%

NorthWest Health REIT initially focused on constructing, selling, leasing, and operating healthcare facilities: hospitals, nursing homes, disability care homes, clinics, and other related establishments. 

Starting its operations in 2004 as a local developer in Ontario under the subsidiary Northwest Value Partners, the fund expanded its reach to several other provinces in Canada: Quebec, Alberta, Nova Scotia, Manitoba, and New Brunswick. 

In 2012, NorthWest Health REIT entered the German market by acquiring several hospitals under professional management and later acquired a medical centre in São Paulo, Brazil. Currently, the fund also holds several properties in London. A diversification across major countries firmly supports the increase in dividends for NorthWest Health REIT. 

In a Nutshell

Real Estate Investment Trusts (REITs) is one of the most convenient and accessible avenues for foreign investors to deploy their funds in Canada. With a low entry threshold, a wide array of funds, and diversified portfolios, investors can tailor their strategy to suit their objectives. A definitive advantage of the REIT format is that investors are relieved from the need to oversee property maintenance, management, and tenant dealings. Additionally, in Canada, REITs are not subject to income tax on dividends, rendering investments in them highly profitable. The safety guarantee for investors lies in the years of experience of Canadian trusts, including dividend aristocrats.

Cover photo: James Thomas (Unsplash)