High inflation is currently a global phenomenon. Many countries are experiencing an inflation rate higher than they have seen in decades, including Canada, which hasn’t seen such a high rate in three decades. The government is taking steps to arrest the situation, but they have their limitations and, usually, unintended consequences.
For example, the Bank of Canada plans to raise the interest rates again to fight the rampaging inflation. This will severely impact the ROI of real estate investment if you are going through the financing route. However, this cannot be considered an unintended consequence, as it will also help deflate the housing bubble, hopefully by a decent margin.
Investing in real estate when you have enough money for a decent down payment works well when you can land an adequately low interest rate. It was an apt strategy during the pandemic when the interest rates were at an all-time low, but now, you might be better off diverting that capital towards REITs.
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An undervalued and discounted REIT
Even though many Canadian REITs are heavily discounted right now, few can match the size of the discount tag on Minto Apartment REIT (TSX:MI.UN). This REIT is currently trading at a P/E ratio of 4.6, making it relatively undervalued. It’s also heavily discounted and is trading at a price almost 33% down from its pre-pandemic one.
Due to the REIT’s less-than-generous dividends, the yield is just 2.6%, even with a sharp decline. But it might still be a promising investment thanks to its capital-appreciation potential, especially if you look at the REIT’s track record before the pandemic.
It’s highly likely that once the uncertainty is gone from the real estate market, the stock will start rising at its former pace, and it will be the growth you want to capture, especially at the current discount.
A stable and high-yield REIT
If you are not interested in the residential real estate due to the current uncertainty, there is a commercial REIT that might be worth considering: NorthWest Health Properties REIT (TSX:NWH.UN). It has a well-diversified portfolio of healthcare properties.
The diversification is both geographic and asset oriented, as the REIT’s portfolio includes different types of healthcare properties, including hospitals and administration buildings.
The portfolio is spread out over eight countries, which puts another layer of safety over its already safe business orientation. Healthcare businesses tend to be steady and prefer to stay in the exact locations for a long time, which can contribute to longer leases.
The REIT offers a healthy 6.12% yield, and the stock is relatively stable. In the last five years, it has risen roughly 21% and has proven to be quite resilient against market crashes and dips.
Foolish takeaway
A combination of the two REITs can offer you both income and capital appreciation, just like a real estate asset would. And if you consider the high cost of financing your real estate asset, especially after the upcoming interest rates, the REITs are a significantly wiser investment.
