Investing in real estate can be an effective way to diversify a portfolio of stocks and bonds – but most investors can’t afford to buy a mix of large-scale properties representing different real estate types in different geographic regions.
Real estate investment trusts (REITs) make real estate investing much more accessible to individual and institutional investors. A REIT owns and may operate income-generating properties, such as:
Since REITs were introduced in the United States in 19601 and in Canada in 1993, hundreds have been established in more than 35 countries.
There are two main type of REITs in Canada
Whether they’re public or private, REITs may have a broad or narrow focus by property type and geographic area of operation.
REITs can offer higher yields than other income generating investments
Canadian REITs have historically provided higher yields than the broad market.
One reason for this is that they are required to flow through virtually all the taxable income their properties generate to investors.
REITs can produce stable yields
In addition, REITs can produce stable yields through different market conditions. After all, they are often supported by a steady flow of rent earned from long-term leases.
REIT yields may even offer some inflation protection because rents generally rise with inflation.
REITs are often non-taxable
REITs act as flow-through entities, and normally distribute all taxable income to unitholders, so that the REIT remains non-taxable. This may be beneficial to investors if their marginal tax rate is lower than that of the corporate tax rate.
Potential tax benefits of return of capital (ROC) distributions
REIT distributions may be a mix of other income and foreign non-business income (taxed at your marginal tax rate), capital gains (50% of the gross capital gains are taxed at your marginal tax rate) and return of capital (tax deferred). Return of capital lowers the adjusted cost base (ACB) of the investment so, when the investment is sold, there will be a higher potential capital gain. However, the return of capital component of REIT distributions means that REIT investors can benefit from:
REITs do for real estate what equity mutual funds do for stocks: they allow investors to get diversified, professionally managed exposure to an asset class with a relatively modest investment.Joe V. Rodriguez - Director, Global Real Estate Securities Management, Invesco Real Estate
Investors like REITs because they have the potential to deliver both an attractive level of income and capital appreciation.Darin Turner – Portfolio Manager, Invesco Real Estate
REIT risk/Real estate risk – Investments in real estate-related instruments may be affected by economic, legal, cultural, environmental or technological factors that affect property values, rents or occupancy rates of real estate underlying the Fund’s holdings. Real estate companies, including REITs (real estate investment trusts) or similar structures tend to be small-cap and mid-cap companies, and their shares may be more volatile and less liquid. The value of investments in real estate-related companies may be affected by the quality of management, the ability to repay loans, the utilization of leverage and financial covenants related thereto, whether the company carries adequate insurance and environmental factors. If a real estate-related company defaults, the Fund may own real estate directly, which may involve the following additional risks: environmental liabilities, difficulty in valuing and selling the real estate, and economic or regulatory changes. For a complete description of other risks that may impact REITs and/or Real Estate products, please refer to the Invesco Canada simplified prospectus.
Commissions, management fees and expenses all may be associated with investments in mutual funds and exchange-traded funds (ETFs). Trailing commissions may be associated with investments in mutual funds. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated. There are risks involved with investing in ETFs and mutual funds. Please read the prospectus before investing. Copies are available from Invesco Canada Ltd. at invesco.ca
1Source NAREIT. Data indicates adoption year of REIT rules