Real Estate Stocks in Canada: Buy or Avoid Now

Investors should be better off buying real estate stocks instead of purchasing physical properties while the housing market remains frothy.

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edit Real Estate Investment Trust REIT on double exsposure business background.

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People invest in real estate because it’s a risk-free way to earn income. In Canada, the low-interest-rate environment and shift to remote work due to the pandemic triggered a buying frenzy. Housing markets have been red-hot since the back half of 2020 and still percolating year-end 2021.

The problem for real estate investors now is that prices have soared tremendously. There’s a chance the housing bubble will burst, although industry experts think it won’t happen. Because of this uncertainty, some investors avoid buying physical properties and instead purchase real estate stocks.

On the TSX, real estate investment trusts (REITs) trade like dividend stocks. You can be free of the nuisances of an actual landlord like maintenance, vacancies, and dealing with tenants. The cash outlay is considerably lower, yet you earn recurring income streams from the investment.

Choosing the sub-sector

The first step when investing in REITs is to know the classifications or sub-sectors. There are landlords of apartment or residential, commercial, retail, office, and industrial properties, and others are in healthcare, hospitality, and specialty or niche sectors.

Industrial properties are currently in high demand because of the e-commerce boom. The next-best choices are grocery-anchored REITs whose anchor tenants sell or provide essential needs and services. However, if you filter the options further, Nexus (TSX:NXR.UN) and NorthWest Healthcare Properties (TSX:NWH.UN) should stand out.

Growth-oriented industrial REIT

Nexus is not only a dividend machine but also a top-performing REIT in 2021. At $12.29 per share, the year-to-date gain is 68.71%, while the dividend yield is a juicy 5.21%. A $50,000 investment will produce $2,605 in passive income.

The $722.33 million REIT owns and operates 105 properties where 69 or 65.7% of the total portfolio are industrial properties. This group contributes 76% of the total net operating income (NOI). The retail (16%) and office (8%) portfolios contribute the rest. Nexus aims to become a pure-play industrial REIT, and the plan is to acquire more industrial assets with strong long-term tenants in attractive markets.

Nexus’ financial performance reflects in the stock’s performance. In the nine months ended September 30, 2021, property revenue, NOI, and net income grew 22.5%, 39%, and 92% respectively versus the same period in 2020.   

Only REIT in the cure sector

NorthWest Healthcare’s star shone brightest during the pandemic as it’s the only REIT in the cure sector. Its portfolio (192 income-producing properties) consists of medical office buildings, hospitals, and clinics. The occupancy rate is 96.9%, while the weighted average lease expiry is 14.1 years. Also, the long-term leases are inflation-indexed.  

The $2.93 billion REIT delivered a strong financial and operational performance in Q3 2021. Management reported a net income of $173.29 million, a 552.6% increase compared to Q3 2020. NorthWest’s near-term plan is to reduce leverage levels and make the balance more flexible. It should position the REIT for future growth opportunities. The share price is $13.46, while the dividend offer is 5.94% if you invest today.

Attractive option in 2022

Industry experts predict home sales will decline when the interest rate hike takes effect in 2022. However, the average home price will still increase by 5.6%. Thus, REITs should be more attractive in such a scenario.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends NORTHWEST HEALTHCARE PPTYS REIT UNITS.

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