This Could Be the Biggest Real Estate Investment of the Year

RioCan Real Estate Investment Trust (TSX:REI.UN) is evolving along with the retail sector, and the opportunity for long-term investors could be huge.

| More on:
House Key And Keychain On Wooden Table

Image source: Getty Images

The importance of diversifying your portfolio is something that can’t be understated. Investors were reminded of that lesson over the holidays last year, as the market erased what was until that point, a good year. Fortunately, a strong start to 2019 has erased much of those losses, but it doesn’t negate the need to properly diversify.

One company that I’m increasingly interested in is RioCan REIT (TSX:REI.UN), which is one of the largest REITs in the country. RioCan’s portfolio consists of mostly large retail holdings, such as shopping malls. While this model caters to large anchor tenants that represent most of the largest names in the retail sector, the sector itself has come under threat in recent years due to the changing face of retail.

Consumers are increasingly turning towards e-commerce and browsing with their smartphones and tablets rather than physically going to stores. This has left traditional retailers at a significant loss, as their dated business models, which correlate success to the size of their showroom, had, until recently, no place for a mobile shopping experience. Some retailers have responded to that threat already, and others, such as Sears Canada, have folded as a result of that change.

Needless to say, RioCan could find itself with an increasing number of vacant properties, unless it too can diversify its portfolio. Company CEO Edward Sonshine alluded to this recently, noting that the demand for retail space will likely remain flat over the next decade. For a company whose portfolio is largely based on renting out large swaths of retail space, that doesn’t sound too encouraging.

Fortunately, RioCan has other plans, and they are, for lack of another word, brilliant.

RioCan’s incredible opportunity to change the market

In addition to the reduced foot traffic to traditional retailers, real estate prices in Canada’s major metro areas remain at extremely high, if not crazy, levels. To even consider that small post-war bungalows in Toronto are selling for nearly a million dollars would be unthinkable a few years ago, but that’s what the market is coping with at the moment, as prices have shot up and supply has dwindled. In addition, millennials entering the job market and looking for a place to live are increasingly being pushed to the suburbs, where rents are more affordable, but commutes are longer.

The perfect, yet unattainable scenario for those young professionals is accommodations within the city that can offer all the modern conveniences that city life can offer, while being close to the job market and affordable. Fortunately, that scenario is precisely what RioCan Living is bringing to market.

RioCan is in the process of building centrally located buildings within major metro areas that combine several floors of retail with housing units. Several buildings are already planned across major metro areas of the country, with the first units in Toronto set to be completed later this year. In total, RioCan is targeting a whopping 10,000 new residential units as part of its RioCan Living portfolio, spread across 50 properties in different markets within the next six years.

From a cost standpoint, RioCan is using the decline in retail demand to help finance the project. Selling non-core assets from RioCan’s pool of properties is slated to provide $2 billion towards the venture, most of which has already been procured through sales that began last year.

If that weren’t reason enough to consider RioCan, then perhaps the appetizing monthly distribution may help potential investors take the plunge. RioCan’s current yield stands at 5.74%, making it not only one of the best long-term growth plays, but also an attractive income generator.

While there are risks associated with RioCan’s shift towards mixed-use properties, the long-term opportunity for investors remains massive, provided that they can stomach some short-term volatility through the adjustment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Demetris Afxentiou has no position in any of the stocks mentioned.

More on Investing

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »