Real estate investment trust

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A real estate investment trust (REIT) is a popular income-producing security that enjoy tax advantages, including return of capital. REITs invest in a variety of properties, including apartments, hotels, industrial parks, office buildings, retirement residences and shopping malls. As trusts, they are required to distribute most of their earnings to unitholders, i.e., the investors. They have offered relatively high yields thanks in part to the tax characterization of their distributions.

Some investors invest a small percentage of their for portfolio in Canadian or foreign REITs for diversification purposes, for example in various complex portfolios. The diversification argument is based on the limited correlation between REITs and other asset classes.[1][2] Other advantages of REITs are liquidity (compared to direct real estate investments), professional management, high yields and regular (typically monthly) distributions.[3]


Following U.S. tax changes in 1986 that constrained the pass-through of losses to investors in limited partnerships (LPs), REITs found a level playing field. While publicly traded LPs were almost invisible in Canada, [4] REITs gained a footing after the Olympia and York collapse in the early 1990s commercial real estate bust (which also took down Confederation Life).

From three REITs in the early 1990s, the market has expanded to 48 REITs on the Toronto Stock Exchange at the end of 2015 with a market capitalization of $53 billion.[3]

Returns, risk and correlations

Annualized returns

Over the period 2003-2016, the S&P/TSX Capped REIT Index had an annualized return of 10.7%, versus 9.0% for the S&P/TSX Composite (Canadian equities), 7.9% for the S&P500 (US equities), and 6.3% for the MSCI EAFE (International equities), all expressed in Canadian dollars.[5] These high REIT returns may not persist in the future, but at least this shows that REITs can have returns comparable to those of broader equity indices.


Standard deviation of annual returns is one possible measure of risk. Higher standard deviation mean greater volatility. Over the period 2003-2016, the S&P/TSX Capped REIT Index had a standard deviation of 21.6%, compared to 17.3% for the S&P/TSX Composite, 15.2% for the S&P500 and 15.8% for the MSCI EAFE.[5] So Canadian REITs are typically more volatile than broader equity indices. In 2008, REITs lost 38.3%, which is worse than the other three indices, which lost between 23 and 33% when expressed in Canadian dollars.[5]


The correlation coefficient measures the degree to which two variables are related.[6] This coefficient can range from -1 (perfect negative correlation) to +1 (perfect positive correlation), while zero means that there is no relationship. The following table shows the correlation between Canadian REITs and other asset classes over the period 2003-2016:[5]

Asset class Correlation with REITs
3 month T-bills -0.25
Cnd bonds 0.21
RRB 0.53
S&P/TSX 0.81
S&P500 0.25
Emerging markets 0.81
Gold -0.07

While Canadian REITs indeed have a moderate, low or even negative correlation with many asset classes, the correlation with Canadian equities is quite high, so portfolios very heavy in Canadian equities may not get as much diversification benefit they had hoped for.

Percentage in model portfolios

Model portfolios for "balanced" investors (about 60% equities, 40 fixed income) typically include between 0% and 10% REITs. The following table compiles recommendations from specific sources aimed at Canadian investors:

Source Percentage REITs
Canadian Couch Potato 0%
Ishares Canada 0%
Mawer Balanced Fund 0%
Morningstar 0%
PH&N 0%
PWL Capital (Justin Bender) 0%
Vanguard Canada 0%
Dimensional Fund Advisors 2.5%
Canadian Capitalist 5%
PWL Capital (Justin Bender) 6%
Shareowner 10%

A number of US sources (aimed at US investors) recommend higher REIT percentages, in the 5-15% range, for balanced portfolios. The following table shows four examples:

Source Percentage REITs
Rick Ferri 6%
William Bernstein[7] 6-9%
Bill Schultheis 10%
David Swensen 15%

There is nothing special about the 6% number that pops up in the tables above: it can be arrived at by arbitrarily assigning 10% of equities to REITs, and for a 60% equity-40% fixed income portfolio, that means 6% REITs.

Tax characteristics

As with any publicly traded company formed as a trust, a REIT distributes its taxable income to its trustholders. Otherwise, its earnings would be taxed at the trust's corporate income tax rate, rather than the trustholder's top marginal tax rate.

What adds to the attractiveness of REIT distribution is that, depending on the trust indenture, much of the Capital Cost Allowance (CCA) is flowed through to investors. CCA is depreciation; as it is flowed through, it reduces the unitholder's adjusted cost base (ACB). When the ACB reaches zero, any divestment is calculated as a pure capital gain.

Apart from that, income earned by the REIT can be recharacterized. It may flow through as earned income, dividends, or capital gains (as well as return of capital). From Deloitte:[8]

  • The income from a REIT is generally characterized as other income from trust property for income tax purposes. For example, if a REIT's taxable income is $11 million, of which $10 million is derived from rental income and $1 million is interest income, a 0.1% investor, for tax purposes, does not receive an allocation of $10,000 of rental income and $1,000 of interest income on the T3 supplementary form. Instead, that investor would simply receive $11,000 of income classified as other income.
  • Rental income is generally included in the definition of earned income for Registered Retirement Savings Plan (RRSP) purposes, but the rental income earned by a REIT is not rental income in the hands of the unitholder. Therefore, taxable income received by an individual REIT holder does not qualify as "earned income" for the purpose of calculating the investor's RRSP contribution limit for the following year.
  • Fortunately, the Income Tax Act does contain rules that permit a REIT to designate certain types of income to essentially retain its character upon distribution to the unitholder. For example, a REIT may designate a taxable capital gain distributed to the unitholders to be a taxable capital gain to such unitholders. As a result, an investor will pay income tax on only one-half of the share of the capital gain realized and distributed by the REIT. A REIT may also designate a dividend received from a taxable Canadian corporation and distributed to the unitholders to be a dividend received by the unitholder. An individual investor could then benefit from the dividend tax credit.
  • Provided the REIT has allocated its taxable income to its unitholders, each investor in the REIT will receive a T3 Supplementary slip either directly from the REIT or indirectly through the brokerage house with whom the units are held on behalf of the investor. The unitholder will then be able to determine what portion of the distributions represents capital gains, dividends from Canadian corporations (usually flowing from the REIT's corporate subsidiaries) and other income. These amounts are then reported on the investor's personal income tax return.
  • The return of capital distributed by the REIT, i.e. the amount of the distribution paid by the REIT in excess of the taxable income (which includes, if applicable, capital gains), is generally not taxable immediately to the unitholder. However, the unitholder's adjusted cost base (ACB) of the units will be reduced by such amount, as discussed below. A return of capital distribution is attractive to the unitholder as it essentially represents tax-deferred cash flow from the REIT.

Exchange traded funds (ETFs)

An investor may choose to invest in Real Estate Investment Trusts using exchange-traded funds (ETFs) for this sector.

The oldest REIT ETF, which commenced on October 17, 2002, is the iShares S&P/TSX Capped REIT Index Fund (TSX: XRE), which tracks the performance of the S&P®/TSX® Capped REIT Index. The stated management fee is 0.55%.

On May 19, 2010, BMO Financial Group launched[9] the BMO Equal Weight REITs Index ETF (TSX: ZRE), tracks the which Dow Jones Canada Select Equal Weight REIT Index. The stated management fee is 0.55%.

The newest entrant, launched November 1, 2012, is Vanguard Canada's FTSE Canadian Capped REIT Index ETF (TSX: VRE) with tracks the performance of the FTSE Canada All Cap Real Estate Capped 25% Index (or any successor thereto).[10] The stated management fee is 0.35%. Note that the index on which VRE is based includes companies which are not REITs, but in early 2017, the top five holdings are the same as in XRE. Formerly, the inclusion of Brookfield Office Properties in VRE's top five holdings meant that yearly returns could differ significantly.[11]

XRE holdings

XRE Holdings March 2, 2017[12]
Name Ticker  % of Assets
RioCan REIT TSX: REI.UN 18.2
Canadian Apartment Properties REIT TSX: CAR.UN 9.2
Smart REIT TSX: SRU.UN 8.2
Canadian REIT TSX: REF.UN 7.7
Applied Properties REIT TSX: AP.UN 6.4
Cominar REIT TSX: CUF.UN 5.3
Granite REIT TSX: GRT.UN 4.6
Dream Office REIT TSX: D.UN 4.4
Artis REIT TSX: AX.UN 4.1
Milestone Appartments REIT TSX: MST.UN 3.7
Boardwalk REIT TSX: BEI.UN 3.5
Pure Industrial REIT TSX: AAR.UN 3.0
Crombie REIT TSX: CRR.UN 2.5
Dream Global REIT TSX: DRG.UN 2.5
Northview Appartment REIT TSX: DI.UN 2.2
Total number of holdings 16

ZRE holdings

ZRE Holdings March 3, 2017[13]
Name Ticker  % of Assets
Dream Office REIT TSX: D.UN 6.2
Granite REIT Stapled UN TSX: GRT.UN 6.1
Milestone Apartments REIT TSX: MST.UN 6.1
Cdn Apartment Prop REIT TSX: CAR.UN 5.8
Dream Global REIT TSX: DRG.UN 5.8
Northview Apartment REIT TSX: NVU.UN 5.8
Pure Indst Real Estate Tr TSX: AAR.UN 5.7
Choice Properties, REIT TSX: CHP.UN 5.7
Chartwell Retirement Res TSX: CSH.UN 5.6
Canadian REIT TSX: REF.UN 5.6
Artis REIT TSX: AX.UN 5.4
Allied Properties REIT TSX: AP.UN 5.3
Smart REIT TSX: SRU.UN 5.2
Crombie REIT TSX: CRR.UN 5.0
Cominar REIT TSX: CUF.UN 4.8
Boardwalk REIT TSX: BEI.UN 4.7
Total number of holdings 18

VRE holdings

VRE Holdings January 31, 2017[14]
Name Ticker  % of Assets
RioCan REIT TSX: REI.UN 16.5
Canadian Apartment Properties REIT TSX: CAR.UN 8.4
Smart REIT TSX: SRU.UN 6.9
Canadian REIT TSX: REF.UN 6.7
Chartwell Retirement Residences TSX: CSH.UN 5.6
Allied Properties REIT TSX: AP.UN 5.6
Cominar REIT TSX: CUF.UN 5.2
FirstService Corp. TSX: FSV 4.2
Granite REIT TSX: GRT.UN 4.0
Dream Office REIT TSX: D.UN 4.0
First Capital Realty Inc. TSX: FCR 3.9
Artis REIT TSX: AX.UN 3.5
Boardwalk REIT TSX: BEI.UN 3.5
Colliers International Group Inc. TSX: CIGI 3.3
Northview Apartment REIT TSX: NVU.UN 2.0
Extendicare Inc. TSX: EXE 1.8
Morguard REIT TSX: MRT.UN 1.0
DREAM Unlimited Corp. Class A TSX: DRM 0.7
Total number of holdings 19

See also


  1. Justin Bender, Should you invest in REITs?, May 30, 2012, viewed March 4, 2017
  2. Real property association of Canada (REALpac), Why Invest in REITs?, viewed March 4, 2017
  3. 3.0 3.1 Samita Pachai, 2016, Real Estate Investment Trusts In Canada, University of Western Ontario, Master of Laws thesis, viewed March 4, 2017
  4. Deloitte, 8th Edition REIT Guide, Toronto, 2004. Also [archived here.]
  5. 5.0 5.1 5.2 5.3 Data sources: Libra Investment Management except for REITs, taken from S&P for 2007-2016 (viewed March 5, 2017) and from ETFinsight for 2003-2006 (viewed March 5, 2017)
  6. Investopedia, Correlation Coefficient, viewed March 5, 2017
  7. William Berstein, 2002, The Four Pillars of Investing, McGraw-Hill: "Taxable Ted"'s portfolio (p. 267) and "Sheltered Sam"'s portfolio (p. 270)
  8. Deloitte, p. 15.
  9. BMO Equal Weight REITs Index ETF - Equity - BMO Exchange Traded Funds (ETFs), viewed February 15, 2012.
  10. Vanguard Canada Individual- FTSE Canadian Capped REIT Index ETF. Viewed December 10, 2012.
  11. Canadian Couch Potato blog, Why Has VRE Outperformed Its Rivals in 2013?, viewed December 30, 2013.
  12. iShares Canada, XRE Holdings - iShares ETFs. Viewed March 5, 2017.
  13. BMO Equal Weight REITs Index ETF - Equity - BMO Exchange Traded Funds (ETFs) Holdings. Viewed March 5, 2017.
  14. FTSE Canadian Capped REIT Index ETF (VRE) Holdings. Viewed March 5, 2017.

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