Investing in real estate is one of the most reliable ways to build wealth. Traditionally, this meant purchasing physical properties for rental income and long-term appreciation. However, buying individual properties requires significant capital and effort. Enter Canadian real estate investment trusts (REITs) — a more accessible way for investors to gain exposure to real estate with flexibility, liquidity, and potential for growth.
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Why Canadian REITs are worth consideration
Canadian REITs allow investors to invest in a diversified portfolio of real estate without the need for large upfront costs. They provide an easy entry into the market, and because they trade like stocks, they offer liquidity. That is, investors can buy or sell shares during market open hours. Additionally, many Canadian REITs distribute monthly cash distributions, providing consistent income for investors.
With recent interest rate cuts from the Bank of Canada, REITs have become even more appealing. After peaking at 5% in July 2023, the policy interest rate was reduced by the Bank of Canada to 3.75% by October 2024. Lower interest rates are typically beneficial for REITs, which often carry substantial debt in the form of mortgages. With reduced borrowing costs, Canadian REITs can expect lower interest expenses, helping to improve their cash flow and overall financial health.
Here are a couple of the top Canadian REITs you can consider today.
Granite REIT: A growth-driven industrial portfolio
Granite REIT (TSX: GRT.UN) is a great idea for investors looking to capitalize on the e-commerce boom. With a diversified portfolio heavily weighted toward industrial properties, including distribution centres and e-commerce facilities, the REIT should benefit as online shopping continues to grow.
The REIT offers a solid cash distribution yield of 4.3% that pays out monthly, which has become more attractive as interest rates have moderated. A notable strength of Granite REIT is its decreasing reliance on Magna, its largest tenant. In fact, exposure to Magna has dropped significantly since 2012, leaving Granite REIT with a more diversified income base.
Analysts are optimistic about Granite REIT’s prospects, predicting a 17% potential appreciation in the stock over the next year. This combination of steady income and growth potential makes Granite REIT an excellent choice for both income and upside potential.
Canadian Apartment REIT: A blue-chip residential play
For those seeking a more conservative, blue-chip option in the REIT space, Canadian Apartment REIT (TSX: CAR.UN), commonly known as CAPREIT, is a top contender. Specializing in residential real estate, CAPREIT boasts an impressive occupancy rate of around 98%. This stability enables the REIT to weather economic fluctuations with minimal setbacks, making it a logical choice for risk-averse investors.
Over the past 20 years, CAPREIT has shown remarkable resilience, with only three years experiencing a slight decline in funds from operations (FFO) per unit. Although CAPREIT has faced challenges due to rent controls that limit rent increases on older properties, the company is actively addressing this issue by selling older buildings and reinvesting in newer ones. This action should also reduce its repair and maintenance costs.
At $45.85 per unit at writing, CAPREIT offers a yield of almost 3.3%. Analysts believe the stock is undervalued and could potentially rise about 21% over the next 12 months. Additionally, population growth in Canada is a tailwind that should support continued demand for rental housing, further boosting CAPREIT’s performance.
