The real estate sector of Canada could see some recovery as interest rates ease, but not anytime soon. When I say recovery, house buying will continue to remain subdued as people who purchased the house at a premium won’t sell for anything less. And the price hike from the 8% inflation in 2022 could continue to affect purchases of big-ticket items for a few years.
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The rental side of real estate
But that leaves room for rental income to grow and prosper. In the rental space, commercial offices are facing a change in secular trends after the pandemic disrupted the office culture. Many companies are adopting a hybrid or remote work culture to save on significant rental income. Commercial properties are struggling to retain tenants or lease big office spaces. Residential properties earn a relatively lower rent of 2-3% of the property price.
One of the most lucrative properties is retail stores. The e-commerce boom drove online shopping, but it could not replace the in-store experience. Within retail, discretionary retail did face the heat of falling occupancy rates, but a few REITs thrived and are now set to benefit from the recovery in retail.
SmartCentres REIT
SmartCentres REIT (TSX: SRU.UN) saw a recovery in rental income as its leasing activity picked up. Its occupancy rate increased to 98.5% in September from 98.2% in June. The retail real estate investment trust (REIT) has continued to pay distributions to its unitholders even when they reached 100% of its adjusted funds from operations. Now that things are improving, the payout ratio is reducing. It was at 75.2% in the third quarter.
This whole episode shows SmartCentres REIT’s resilience to thrive in a difficult real estate market without any distribution cuts. And one major reason for its resilience is its biggest tenant, Walmart. Resilience gives you confidence that the REIT will keep paying you in good and bad times. The REIT is offering a yield of 7.37% at the time of writing, and it spreads this yield in 12 monthly installments. At the end of the year, a $10,000 investment will give you $737 in 12 monthly installments. And this could go on for decades.
CT REIT
CT REIT (TSX: CRT.UN) is the trust of Canadian Tire and manages the retailer’s properties. Canadian Tire sells its stores to CT REIT and pays rent, thereby getting the benefit of deducting rental expenses from taxable income. Meanwhile, CT REIT distributes this rent to unitholders, where Canadian Tire has large holdings.
This corporate structure is cost-effective and tax-efficient. CT REIT also undertakes property acquisition, intensification, and development of Canadian Tire stores to charge a higher rent. The REIT’s third-quarter net operating income from property increased by $3.7 million year over year to $113.6 million due to the acquisition, intensification, and development completed in 2023 and 2024.
Since the REIT does not have to worry about occupancy, it even increases its distributions annually by 3% in July. Its dividend payout ratio is at a comfortable 75%.
CT REIT is offering a yield of 6.12% at the time of writing. A $10,000 investment will give you $612 in 12 monthly installments. And this money will grow by 3% annually, giving you an inflation hedge. After 10 years, $612 could become $798.5.
Investing in real estate stocks for less than $500
Investing $10,000 in one go could be tough. But you can invest $500 every month in the above stocks and get the benefit of a one-time $10,000 investment in less than two years. The unit price fluctuation could affect your payouts. But delaying investing will cost you way more than the two-year delay.
