NEW IDEA IN REAL ESTATE
The new idea in Real Estate investment is the REIT, which stands for Real Estate Investment Trust. It is basically indirect exposure to the Real Estate sector.
Major features are:
- Its an Investment Fund, just like a mutual fund, legally set up as
a trust.
- The fund builds, buys and repossess properties and manage them.
- Income comes from rental income, capital gain and other
investments.
- By law, REITs must distribute100% of its taxable income for a
taxation year so that it does not incur tax.
Owning
a REIT gives the benefits of being a landlord without having to face
the hassle of actively managing the property.
REITs
are governed by many regulations, the most important being that they must
distribute all/most of their taxable income to unitholders/shareholders each
year as distributions. That’s why they’re so popular with investors seeking
steady income.
Other important regulations include:
Asset requirements: at least 75% of assets must be real estate,
cash, and government securities.
Income requirements: at least 75% of gross income must come from
rents, interest from mortgages, or other real estate investments.
Stock ownership requirements: shares in the REIT must be held by a
minimum of 100 shareholders.
REITs specialize by property type. They invest in most major property types with nearly two-thirds of investment being in offices, apartments, shopping centers, regional malls, industrial facilities, and even fast-food chains.
BENEFITS OF REITS
High Yields. For many investors, the main attraction of REITs is their dividend yield. The average long-term (15-year) dividend yield for REITs is about 8% — well more than the yield of the S&P 500 Index. Also, REIT dividends are secured by stable rents from long-term leases, and many REIT managers employ conservative leverage on the balance sheet.
Simple Tax Treatment. Unlike most partnerships, tax issues for REIT investors are fairly straightforward. Each year, REITs send Form T3 to their shareholders (in case of non-registered accounts), containing a breakdown of the dividend distributions. For tax purposes, dividends are allocated to ordinary income, capital gains, and return of capital. As REITs do not pay taxes at the corporate level, investors are taxed at their individual tax rate for the ordinary income portion of the dividend.
The portion of the dividend taxed as capital gains arises if the REIT sells assets. Return of capital — or net distributions in excess of the REIT's earnings and profits — are not taxed as ordinary income, but instead applied to reduce the shareholder's cost basis in the stock. When the shares are eventually sold, the difference between the share price and reduced tax basis is taxed as a capital gain.
Liquidity of REIT Shares. One can buy and sell REIT shares easily bought on a stock exchange. By contrast, buying and selling property directly involves higher expenses and requires a great deal of effort.
Diversification.Studies have shown that adding REITs to a diversified investment portfolio increases returns and reduces risk since REITs have little correlation with the S&P 500.
PERFORMANCE
The S&P/TSX Capped REIT Index is up 19 per cent on a cumulative basis over the past three years, roughly three times more than the broader market.
The
S&P/TSX Capped REIT Index is a subset of the broad-based S&P/TSX Income
Trust Index. It is a sector-based index comprised of Real Estate Income
Trusts which are classified in the Financials sector of the Global Industry
Classification Standard (GICS®). Individual constituent REITs’ relative
weights are capped at 25%. The Toronto Stock Exchange (TSX) serves as the
distributor of both real-time and historical data for this index.
Performance
Data
|
INDEX
NAME |
PERFORMANCE
(AS ON 30-SEP-2022) * |
|
|
|
3 YEAR |
Inception
(Oct 17-2002) |
|
S &
P/TSX CAPPED REIT INDEX |
4.27% |
8.77% |
·
Source: Blackrock.com
A
FURTHER LOOK AT THE FEATURES
REITs have been largely immune from market chatter, which is appropriate
because they’re positioned to thrive in today’s low-rate, low-growth world.
REITs hold portfolios of malls, industrial properties, offices, apartments,
hotels or retirement homes.
- They typically pay out quarterly income to investors, with a
significant portion coming from a return of capital.
- Income received as a return of capital isn’t taxed in the year it’s
received, but it does reduce the adjusted cost base for an investment.
This, in turn, may give the investor a larger capital gain when he sells.
- REITs as being somewhere between average and peak valuation levels,
which means the opportunity for serious price appreciation has passed.
- Even after a small recent pullback, the REIT index has gained 16
per cent in the past 12 months.
- What’s left is an opportunity to generate income yielding about 5
per cent and additional share price gains of 4 to 6 per cent based on
strong fundamentals for commercial real estate.
- There are key differences between that segment and residential real
estate, which appears to have peaked in Canada.
- Residential Real Estate market has uncertain growth prospects.
- By comparison, commercial real estate is in good shape. Even with the
economy growing slowly, REITs have been able to consistently increase
their cash flow.
- Acquisitions, new developments and redevelopments of existing
properties have helped boost cash flow, as have rising occupancy rates and
rents.
- Shopping mall REITs are benefiting from the arrival of U.S.
retailers such as Target and Nordstrom.
- Industrial REITs are recovering from a hit to their tenants caused
by the rising Canadian dollar (which makes our exports less competitive).
- Office REITs are doing well because of a limited supply of office
space.
FINAL
COUNT
- REITs are consistent cash flow earners.
- Commercial REITs are front runners.
- With arrivals of giant retailers like Wal-mart, Targets and
Nordstrom in Canada and also through expanding consumer base, commercial
REITs create a solid cash flow machine
- On average 5 percent dividends are earned, on top of that, 4 to 6
percent capital gain can be earned.
