As an investment asset, real estate has a high-cost barrier by default. It’s not an affordable asset class for most retail investors, even if you take syndication into account. And that’s when the housing market is normal. The current Canadian housing market, which has only started to cool-off is likely to stay expensive for years to come, that is, an overvalued investment asset.
So if you are adamant about getting exposure to the real estate market, the next best option is investing in REITs. There are numerous benefits, including a very low-cost barrier, relatively generous dividends, and liquidity of the asset, which allows you to exit your position virtually instantaneously if need be.
A commercial REIT
Melcor REIT (TSX:MR.UN) spun off from Melcor developments and had its initial public offering in 2013. It’s a commercial REIT with a focus on the Western Canadian real estate market. The portfolio is made up of 39 properties, mostly office, retail, and a few industrial properties. The office properties suffered from a relatively lower occupancy rate in 2020, but it’s expected to improve now that the pandemic is behind us.
Melcor stock dipped quite a bit during the pandemic, but it’s now on the mend. It grew over 85% in the last 12 months. The REIT had to slash its dividends quite a bit in April 2020, but it has started to grow its dividends again, and if you buy now, you might see a significant increase in the payouts in the coming years. But that’s contingent on whether or not the REIT is planning to hit its pre-pandemic payout. The current yield is 6%.
A shopping centre REIT
SmartCentres (TSX:SRU.UN) is all about shopping centres. It’s the largest developer and operator of its kind in the country and has a portfolio of about 168 properties, about 68.4% of which are anchored by Walmart, giving its portfolio a lot of tenant-stability. Most other tenants are creditworthy leaders in their respective industries, including telecom giants and big five banks.
SmartCentres still retains its title of an aristocrat, but it will need to grow its dividends in 2021, or it will lose this title. The REIT is offering a generous 6.1% yield at a very high payout ratio. The yield is enough to get you about $500 a month if you invest $100,000 in the REIT, which is equal to a 20% down payment on a modest, half-a-million-dollar property. And this “rent” comes with no maintenance deductions and active landlord responsibilities.
A niche commercial REIT
If mainstream retail and shopping center properties are not your cup of tea, you might consider a niche REIT like Automotive Properties REIT (TSX:APR.UN). It has a portfolio consisting solely of car dealership properties (66 of them), in major metropolitan markets. Dealerships in GTA, GMA, Ottawa, and Calgary make up almost 70% of the market.
The REIT works with 32 automotive brands, ranging from affordable and commonplace to luxury vehicles, including some of the most beloved brands in Canada. A steady income source equals consistent and reliable rent, which is the core strength of this REIT. It’s currently offering a 6.3% yield at a stable payout ratio of 82.7%.
The housing market in Canada is just finishing one of the strongest bull runs in history, and even though some investors might still be bullish on this market, many might be turning away to other assets. REITs offer you a great way to get into the real estate market and still stay away from the rapidly changing housing market.
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 owns shares of and recommends AUTOMOTIVE PROPERTIES REIT. The Motley Fool recommends Smart REIT.