2 Commercial REITs to Steer Clear of the Housing Market

For many investors, the housing market is a bomb ready to explode. So, if you want to stick with the asset class (real estate), commercial REITs might be a good alternative.

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Commercial REITs didn’t have a great 2020. People didn’t visit many retail stores, the hospitality industry experienced one of the driest seasons, and many office buildings were devoid of any employees, since they were working from home. The revenues of commercial REITs didn’t suffer as severely as they could’ve, thanks mainly to the long-term lease structures, but they still saw revenues drop.

But now that the economy is recovering and everything is returning to normal, the new normal, at least, commercial REITs might be a safer bet than the aggressive housing market.

An office REIT

Slate Office REIT (TSX:SOT.UN) is a pure-play North American office REIT. The company focuses on creating an office property portfolio comprising of downtown and suburban properties — an avenue where it anticipates significantly less competition than large office towers in major cities. The REIT has a portfolio of 33 properties, one-third of which are located in Toronto. It also has a U.S. presence, but it’s minimal compared to its asset base in Canada.

The share price has grown about 13% in the last 12 months. But the capital growth prospects of this REIT aren’t just non-existent; they are practically negative. In the last five years, the stock has come down about 43%. But the REIT is offering something else — a mouthwatering yield of 8.8%. The revenue of the company, while still not fully recovered, is on its way up to the pre-pandemic value.

The REIT slashed its dividends in 2019, and it sustained its payouts all through 2020. The chances that it will cut its dividends again anytime soon are quite low.

A shopping centre REIT

With 167 properties to its name, 115 of which are anchored by a reliable tenant like Walmart, SmartCentres REIT (TSX:SRU.UN) is another great asset you can look into if you want to enter the real estate market from the “commercial” door. The REIT saw relatively steady growth from the beginning of 2021, and the stock is up 23% in four years.

But the growth hasn’t “dimmed” its impressive yield, and the company is still offering payouts at a juicy 6.4% yield. The REIT is technically still an aristocrat, and if it manages to grow its dividends anytime this year, it will probably hold on to the mantle. Even though the payout ratio is dangerously high, SmartCentres’s position as an aristocrat and the fact that its revenues reached pre-pandemic levels before 2020 was over tells us that the REIT is highly likely to sustain or even grow its dividends.

Foolish takeaway

The two REITs can help you start a sizeable passive income if you invest a decent sum in both of them. But if you are starting with relatively smaller capital, a good idea would be to reinvest the dividends. The low prices will work in your favour, and if the REITs can sustain or grow their dividends for a decade or so, the reinvestment will make them potent passive-income sources. And when you are ready to start cashing out dividends, you will get a decent enough sum to augment your income.

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Smart REIT.

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