A REIT is an entity that specializes in owning and operating properties that generate income. These properties might be commercial, like office buildings, warehouses or shopping malls; multi-residential like apartment buildings; or more left-field assets like data centres and cell towers.
While some REITs specialize in certain sectors of real estate, such as commercial properties, they still provide diverse investments because they hold different property types in different markets. You’re unlikely to find a REIT that only buys, say, single-storey shopping plazas in Toronto. By mixing assets and their locations, REITs provide a hedge against regional downturns that could otherwise damage their rental income.
And rental income is the name of the game for REIT investors, as the rent collected makes up the cash that the trust returns to investors as shareholder dividends. Even if the assessed value of a REIT’s properties falls for some reason, as long as rental income remains steady, your dividends should too.
REITs are similar to mutual funds, in that investors provide the money a REIT needs to grow and maintain its portfolio, and the trust rewards them for their investments with regular dividends. You can purchase shares in a REIT on a public market like the Toronto Stock Exchange, the same way you would any stock.
The benefits of investing in REITs
In addition to the baked-in diversification, something you don’t get when you purchase an individual property, REITs provide a few other benefits.
First, you won’t need to take on the headaches endured by many property investors. No maintenance, no repairs, no impossible-to-satisfy tenants. You get the financial benefits of being a landlord without the hassle.
REIT shares are also highly liquid. You can offload them as easily as any stock you might sell using a trading app on your phone.
The distributions paid out by REITs can help you increase your fixed-income returns and provide your portfolio with an added hedge against inflation, because when rental rates increase, so does a REIT’s income.
Mind the risks — including rising interest rates
Choosing a REIT isn’t always easy. You’ll want to find one with the right mix of assets and a strong management team that can consistently grow profits. That requires due diligence on your part.
Because REITs are sold on public stock exchanges, you need to approach a REIT investment the same way you would a dividend stock. The payouts might remain constant, but the share price is still subject to the whims of the market. There’s no guarantee that REIT shares will keep growing, or that they won’t take a sudden nosedive.
From Nov. 24 to Dec. 1, 2021, RioCan Real Estate Investment Trust, Canada’s second-largest REIT, saw its share price drop a steep 8.7 per cent, to under $21 per share. But RioCan’s share price recovered all of that within a month, trading around $23 by early January.
Another risk to be wary of involves interest rates. REITs typically don't perform well when interest rates rise. Investors often see an opportunity to purchase bonds and other forms of fixed income instead, which tamps down REIT demand and share prices.
With the Bank of Canada expected to raise its overnight rate multiple times in 2022, Canada's REITs could be under increased pressure to keep performing well in the coming year.
Fine art as an investment
Stocks can be volatile, cryptos make big swings to either side, and even gold is not immune to the market’s ups and downs.
That’s why if you are looking for the ultimate hedge, it could be worthwhile to check out a real, but overlooked asset: fine art.
Contemporary artwork has outperformed the S&P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.
And it’s becoming a popular way to diversify because it’s a real physical asset with little correlation to the stock market.
On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12 during the past 25 years.
Earlier this year, Bank of America investment chief Michael Harnett singled out artwork as a sharp way to outperform over the next decade — due largely to the asset’s track record as an inflation hedge.
Investing in art by the likes of Banksy and Andy Warhol used to be an option only for the ultrarich. But with a new investing platform, you can invest in iconic artworks just like Jeff Bezos and Bill Gates do.