Buy This REIT to Profit From Toronto's Soaring Housing Market!

Buy This REIT to Profit From Toronto’s Soaring Housing Market!

If you want to profit from Toronto’s soaring housing market, consider RioCan (TSX:REI.UN).

Andrew Button

Author Bio

Andrew “A.J.” Button is a financial writer with a longstanding interest in value investing and international markets. He began investing at a young age, building a portfolio of dividend stocks to help pay for university. After stepping away from investing for a time, he rediscovered his passion in 2019 when he began working as a freelance financial writer. Since then, Andrew has built a diversified investment approach spanning Canadian, U.S., and international equities, as well as guaranteed investment certificates (GICs) and money market funds. He is particularly interested in international stocks, drawn to their dividend potential and long-term growth opportunities, while maintaining an interest in Canadian businesses. Before joining The Motley Fool, Andrew worked as a freelance copywriter specializing in financial services. He continues to write for financial publications and share his thoughts on stocks through social media.

Education and Professional Credentials

Canadian Securities Course (CSC)
CFA Program Level I examination completed

Areas of Expertise

Value investing, Canadian equities, U.S. stocks, international equities, dividend investing, long-term investing, GICs, money market funds, and portfolio diversification.

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Published February 11, 2020 12:43 pm EST

Toronto’s real estate market is headed for another hot year in 2020.

According to the Toronto Regional Real Estate Board (TRREB), the city’s house prices rose 12.3% year over year in January, capping a decade of incredible gains.

For years, prominent investors have been warning about a “real estate bubble” in Canada’s largest cities. Prem Watsa, one of those who has been sounding the alarm, has been calling for the bubble to burst since 2012. Yet year in and year out, the market keeps defying gravity, driven by supply shortages and rapid population growth.

In the 12 months ended July 2018, Toronto was the fastest growing city in North America, adding 77,000 new residents. That kind of population growth can keep house prices rising for a long time, particularly when coupled with rampant real estate speculation.

Nobody knows exactly how long Toronto’s metoric rise can go on. What can be said with certainty, however, is that one REIT is profiting enormously from the gains.

RioCan Real Estate Investment Trust

RioCan Real Estate Investment Trust (TSX: REI.UN) is one of Canada’s largest REITs. Traditionally, it has focused on big box retail stores, but more recently it has been branching out into residential properties. Its mixed commercial/residential properties typically house big box retail space on the bottom and residential units on the top. The strategy seems to be paying off: in its most recent quarter and nine-month period, Riocan posted monster earnings growth, driven largely by increases in the value of its residential inventory.

The company is planning to keep this growth going, too. In a November 2019 interview, CEO Ed Sonshine said that he and his team were planning “hundreds of millions” in investments in the year ahead.

Increasing investments in residential property

One of the most promising things about RioCan is its increasing investment in residential property. The company has long focused on commercial space, which it has done well with. However, many “big box” retailers are under pressure from e-commerce, which could hit RioCan in the pocketbook.

Residential real estate, on the other hand, is just getting hotter. In addition to the house price increases we’ve been seeing in Toronto, rents are also on the rise. While these trends are bad news for renters, they’re fantastic news for residential-oriented REITs, which profit from the soaring prices.

We’re already beginning to see the results in RioCan’s earnings. As previously mentioned, RioCan’s most recent quarter was a big success, driven in no small part by gains in its residential portfolio. What’s more, there are even more residential developments coming. According to the Real Estate News Exchange, RioCan currently has 4,800 residential units under development, with plans for more. Many of these units are in Toronto, which bodes well for the company’s ability to turn a healthy profit on the properties it’s developing.