REIT Investors: Which Real Estate Sector Is Best?

In the world of real estate investment trusts (REITs), there are plenty of factors to consider. Here’s my take on this asset class right now.

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

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Canadians love investing in real estate. Whether it’s owning a home or taking a slice of a real estate investment trust (REIT), there are plenty of options available that allow investors to participate in one of the most stable and consistently growing real estate markets in the world.

The question is, which sector should investors focus on? Of course, there are residential real estate (homes and apartments), industrial real estate (warehouses and distribution facilities) and retail real estate (strip malls and other related retailers). The options are endless, and the potential for each asset class is different.

Here are three of the top players in the aforementioned sectors I think are worth considering.

Dream Industrial REIT

Dream Industrial REIT (TSX:DIR.UN) is an open-ended, unincorporated REIT. The trust portfolio comprises industrial properties located in key regions of Canada and the United States. Its primary objective is to build and grow its portfolio and provide stable cash distributions to its unitholders. 

Dream Industrial is among the most stable dividend stocks on this list, providing a distribution of 70 cents annualized per share. The company’s funds from operations grew double digits on a year-over-year basis in 2023, signaling the strength of its core business model. As long as this growth continues, I think Dream Industrial and its 5.4% yield are worth buying right now.

Canadian Apartment Properties REIT

Canadian Apartment Properties REIT (TSX:CAR.UN) is a REIT predominantly engaged in acquiring and leasing multi-unit residential rental properties in Canada. Its portfolio consists of apartments and townhomes located near public amenities in Canada, and most of its holdings are aimed towards the luxury and mid-tier markets. 

Canadian Apartment Properties REIT has added more rental homes worth $122.295 million in Canada. Hence, such additions enable this trust to generate higher income and offer solid returns to the unitholders. The company has generated a robust operating income of $692 million in 2023, representing 6.4% year-over-year growth. So, there’s some relatively strong income growth supporting the company’s 2.9% dividend yield (which is the lowest on this list). I’d rate Canadian Apartment REIT a hold here.

SmartCentres REIT

SmartCentres REIT (TSX:SRU.UN) is a Canadian real estate giant with more than 174 strategically located properties in various communities in the country. The company’s wholly-owned residential sub-brand, SmartLiving, offers complete, connected and mixed-use communities on its existing retail properties. 

SmartCentres’s focus on key retail locations in city centres with large blue-chip anchor tenants is a good thing. However, the company’s sky-high yield of 8% does signal stress within the company’s core business model. SmartCentres does appear to have a relatively robust balance sheet, but potential tailwinds in the retail sector concern me. Thus, this stock is rated as a hold in my books, and I wouldn’t be putting fresh capital to work in this name right now.

Bottom line

Overall, I think investing in real estate should be considered for those with a multi-decade time horizon. Anything can happen in the near term, but most real asset classes rise in line (or even slightly above) inflation, depending on where interest rates go.

My personal preference is to focus on industrial real estate, followed by residential and retail. I think industrial real estate trends will remain strong, with greater demand for distribution in strategic locations near city centres. People always need a place to live, so residential real estate would be my second choice. And I think there are just too many headwinds facing retail right now that I’d be more cautious with this group. But over the long term, investors in either of these asset classes should win.

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 Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool recommends Dream Industrial Real Estate Investment Trust and SmartCentres Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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