Real estate is widely regarded as a stable investment that can yield significant returns. However, the traditional route—buying property—requires substantial capital, ongoing maintenance, and active management, which isn’t feasible for everyone. For those who want to benefit from the real estate market without the hands-on work, investing in Real Estate Investment Trusts (REITs) can be a smart solution.

In this blog, we’ll explore what REITs are, how they work, and review some of Canada’s top-performing REITs to help you decide if this investment approach aligns with your financial goals.

What Are REITs?

REITs, or Real Estate Investment Trusts, are companies that own, operate, or finance income-generating real estate. Essentially, a REIT collects money from investors and uses those funds to purchase real estate assets like commercial buildings, apartments, shopping centers, and more. The income generated from these properties—such as rent or sales—is distributed to shareholders in the form of dividends.

Here’s why REITs are appealing:

  • Accessibility: Unlike purchasing a property, REITs allow you to invest in real estate with a small amount of capital.
  • Liquidity: Many REITs are publicly traded, so you can buy and sell them like stocks, making them more liquid than physical real estate.
  • Diversification: REITs offer a diversified investment option across various types of real estate assets.
  • Stable Income: REITs are known for their high dividend yields, making them popular among income-seeking investors.

Types of REITs

REITs can be classified in three ways:

Publicly-Traded REITs are listed on major stock exchanges like the TSX (Toronto Stock Exchange) and NYSE (New York Stock Exchange). These REITs are accessible through a standard brokerage account, making them easy to buy and sell. Publicly-traded REITs offer high liquidity, allowing investors to enter or exit their positions quickly, and they provide transparency through regular financial reporting.

Public Non-Traded REITs are also registered with securities regulators but do not trade on public exchanges. Instead, they are available through specialized platforms known as real estate crowdfunding portals. While they offer diversification and the potential for higher returns, public non-traded REITs are less liquid, often requiring investors to hold their shares for several years.

Private Non-Traded REITs are tailored for accredited or high-net-worth investors and are not available on public markets. These REITs are typically offered through private placements and wealth management firms. They tend to be illiquid, with limited options for selling shares before the investment term ends. However, they can provide unique opportunities with potentially high returns, albeit with greater risk and less regulatory oversight.

These types of REITs can be categorized further into the following:

  1. Equity REITs: These REITs primarily own and operate income-generating real estate. They make money through rent or property sales.
  2. Mortgage REITs (mREITs): Instead of owning real estate, mREITs lend money for mortgages or invest in mortgage-backed securities. They make money from interest on these loans.
  3. Hybrid REITs: As the name suggests, these REITs combine elements of both equity and mortgage REITs.

Canada has a range of publicly-traded REITs that focus on various sectors, from residential to commercial properties. Here’s a look at the largest REITs in Canada.

Largest Canadian REITs in 2024

1. Canadian Apartment Properties REIT (CAPREIT) | CAR-UN.TO

  • Overview: CAPREIT focuses on residential rental properties, including apartments, townhomes, and manufactured home communities across Canada and some in Europe.
  • Performance: CAPREIT has shown consistent growth and high occupancy rates. In 2023, it offered a dividend yield of approximately 3% and is expected to increase to 3.33%.
  • Return History: Over the last decade, CAPREIT has delivered an annualized return of around 8-10%, with a steady upward trend driven by Canada’s increasing demand for rental properties.
  • Why Invest: CAPREIT benefits from the robust rental market, especially in urban centers, making it a resilient choice for investors seeking stability and income.

2. RioCan Real Estate Investment Trust | REI-UN.TO

  • Overview: RioCan is one of Canada’s largest REITs, focusing on retail real estate, including shopping centers and mixed-use urban developments.
  • Performance: The trust had a dividend yield of around 4-6% in 2023. The dividend payout has fallen since the pandemic but is back on the rise.
  • Return History: RioCan’s returns have been impacted by recent retail challenges, but it has pivoted toward mixed-use properties, which include residential rentals above retail spaces.
  • Why Invest: As RioCan continues to transition to a mix of residential and retail, it may provide growth potential in the changing real estate landscape, along with a reliable income stream.

3. Allied Properties REIT | AP-UN.TO

  • Overview: Allied Properties specializes in office and data center spaces, primarily in urban centers. It focuses on “Class I” office properties, which cater to tech and creative industries.
  • Performance: With a dividend yield of around 9-10%, Allied Properties has a unique market focus that helps it stand out among other REITs.
  • Return History: Despite a decline over the last five years, Allied Properties has gained over 12% in the past year, benefiting from the growing demand for flexible workspaces.
  • Why Invest: Allied Properties taps into the technology-driven segment of real estate, appealing to those who want to invest in office spaces with a forward-looking perspective.

These three REITs boast the largest market caps among Canadian REITs, but plenty of other options exist to match your investment thesis. Take Morguard North American Residential, for example—its occupancy rates consistently outperform industry standards, and the REIT has surged nearly 37% over the past year.

Why REITs Are a Smart Choice for Real Estate Investment

REITs offer several key advantages:

  • Diversification: Instead of tying up capital in a single property, REITs allow you to invest across a broad range of real estate types and geographic locations.
  • Passive Income: Most REITs are required to distribute at least 90% of their taxable income to shareholders, which means you can enjoy a steady stream of dividends.
  • Lower Barrier to Entry: You can start investing in REITs with a modest amount of money, unlike buying physical property, which requires significant capital and ongoing maintenance.

Investing in REITs offers a hassle-free way to enter the real estate market without needing to manage tenants or repairs. With a variety of REITs to choose from, you can find options that align with your income goals, risk tolerance, and investment horizon.

Conclusion

For those looking to diversify their portfolios and generate passive income, REITs represent a powerful way to benefit from the real estate sector without the complications of property ownership. With options ranging from residential and retail-focused REITs to those specializing in office and industrial properties, Canadian REITs offer ample opportunities. By carefully selecting REITs with strong track records and stable yields, investors can enjoy a steady income while participating in the long-term growth of the real estate market.

Whether you’re a seasoned investor or just getting started, REITs can be a valuable addition to your financial strategy. Be sure to do your own research, consider consulting a financial advisor, and assess each REIT’s performance and outlook before making a decision.

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