A different, EASIER way to own real estate – Winnipeg Free Press

A lot of people have an interest in being a real estate guru, earning passive income from rent — often heralded on social media channels by real estate investor influencers.

And why not?

Many Manitobans have seen their home values rise significantly in the last decade or more. Plus, real estate’s one of the few investments individuals can easily get their heads around.

Investing in real estate can be less of a challenge if you do it through diversified portfolios of dozens of properties or real estate investment trusts (REITs). (Phil Hossack / Free Press files)

It’s straightforward: own it, rent it, collect the rent, and its value typically rises over time.

Beyond homeownership, investing in real estate can be challenging — at least if you’re trying to buy assets on your own. You probably need to borrow money — a lot of it — and then you have to manage the assets. Although potentially worth the effort, it’s a recipe for headaches, too.

A much simpler way to invest, however, is through REITs (real estate investment trusts) — which are essentially diversified portfolios of dozens of properties.

“The pros of REITs are they’re an affordable means to invest without buying and managing properties of your own,” says Clay Jarvis, real estate expert with NerdWallet Canada.

REIT investors earn money through appreciation of REIT shares — as their underlying properties grow in value — and from dividends from the rents the REIT managers collect — which are often more lucrative and tax-efficient than interest income from bonds and GICs.

“And it’s generally much easier to sell REIT shares on the stock market than it is to sell an actual property,” he adds.

What’s more, today is likely as good a time as any to own REITs.

That’s the assessment of a manager of a leading Canadian mutual fund that invests in REITs around the world.

“Publicly-traded REITs relative to their underlying asset value… have discounts wider than during the Financial Crisis,” says Corrado Russo, head of global securities at Hazelview Investments, noting the 2008/2009 market meltdown saw commercial real estate values plummet.

Hazelview recently published its 2024 outlook for global publicly traded REITs, noting the sector is “ready to take off after two years of sitting on the runway.”

The report goes on to make the case that publicly traded REITs—listed on the Toronto Stock Exchange and New York Stock Exchange for example — are trading at significant discounts to the underlying properties they own and manage.

Russo further explains that REITs were beaten up first by COVID, especially office tower REITs, once among the most valuable in the sector. But other REIT types — like industrial ones, holding warehouses — saw surging demand during the pandemic.

Yet fast-rising interest rates to tame inflation, post-pandemic have harmed REITs’ share prices as investors feared higher borrowing costs would harm profitability.

As well, dividends — typically about four to five per cent — from REITs suddenly seemed less attractive than comparable interest income from largely risk-free bonds and GICs.

Yet Russo notes that many publicly traded REITs — outside of office REITs that continue to struggle with remote work remaining popular—are financially sound while trading at deep discounts to the value of their holdings.

A recent report from S&P Global Market Intelligence reveals as much, noting that U.S.-based REITs as a whole were trading on average at 16 per cent below the value of their assets.

Russo argues the reason for their low market values is largely due to sour investor sentiment.

“The expectation is that those discounts will dissipate as the investor sentiment improves, and the big catalyst will be interest rates stabilizing and potentially going down.”

If buying low and selling high is the goal of investing, then REITs may represent a good opportunity.

Furthermore, REITs today still generate dividend yields of about four to five per cent annually, and they likely have the ability to pay more, Russo adds. “Many REITs have been retaining more earnings for acquisitions and to fix up existing properties to create more cash flow in the future.”

One challenge is figuring out what REITs to buy. The S&P TSX Composite has dozens, and hundreds are listed in the U.S.

Some are broad, investing across many segments of commercial real estate, but most are segment specific, focused on one of 20 different types, including retail, industrial, multi-family, office, cell towers, data-centres and health-care.

Investors can look to funds like Hazelview for actively managed exposure selecting the best REITs across all types of real estate and geographies.

Another way is exchange-traded funds (ETFs) that typically hold all the REITs on an exchange like the TSX, or focus on holding REITs in specific segments, says Nic Tustin, founder of the MoneyGuyNOW.com — a personal finance resource for do-it-yourself investors.

An example of a segment-specific fund is the Pacer Benchmark Industrial Real Estate ETF, listed in the U.S.

If you want exposure to commercial real estate, Pacer is an attractive ETF due to the ongoing need for industrial assets, says Tustin, a financial advisor, based in London, Ont.

What’s more, the Pacer ETF is down about a third in value from its peak.

While opportunity may be at hand, Tustin points out that REITs have collectively “trailed the rest of the stock market for the last decade.”

As well, if you own a home, you already have significant exposure to real estate, Tustin argues. Consequently, adding more exposure with REITs — even though it’s commercial real estate opposed to residential—may not be the most efficient use of capital, especially given the tech sector is driving, and is likely to continue to drive, stock market returns, he says.

“But if you’re a renter, you might want to own REITs to have real estate exposure.”