Real estate investment trusts (REITs) are giving Canadian investors access to international real estate, offering benefits like diversification, steady income and attractive yields in a shifting global landscape.
“REITs tend to be a diversifier relative to equities and bonds, the correlation in the performance of REITs relative to other asset classes tends to be low, and REITs tend to deliver higher yields than broader equities,” said Samuel Sahn, managing partner and portfolio manager of Hazelview Investments.
“You are also getting exposure to sectors and industries and countries with possibly stronger fundamentals than what we see in Canada, which should be a good thing in terms of that investment being additive to a client’s overall total return.”
Hazelview, which has offices in Toronto, New York, Hamburg and Hong Kong, invests in REITs on behalf of institutional, high net worth and retail clients who wish to acquire real estate exposure through the public markets. It currently has approximately $12 billion under management.
It has identified five sub-sectors with especially strong tailwinds: data centres, senior housing, Japanese hospitality assets, commercial real estate brokerages, and German and Australian multi-family residential.
“As we think about 2025 … we see about 20-per-cent upside in the globally-traded REIT market over the next 12 to 24 months,” said Sahn.
“We think the stocks are trading at a 17-per cent discount to intrinsic value, and when you add the fact that dividend yields are nearly four per cent, that translates to about 13- to 15-per cent annualized total returns over the next two years, based on our models.”
U.S. OUTDOOR RETAIL IN FOCUS
As interest rates subside in North America, Canadian investors may be diversifying away from safe havens like GICs and looking for a little more return and yield elsewhere. Real estate tends to come into focus in a lower-rate environment, said Scott Lee, trustee with Revesco Properties Trust, which has offices in Vancouver and Denver.
Revesco is a private REIT with a portfolio of retail open-air assets in the U.S. including grocery-anchored shopping centres in the Sun Belt, where population growth, robust spending and limited supply bolster the outlook.
The REIT pays a distribution of six per cent, in addition to any increased value in its units, which are accessible through exempt market dealers and select investment advisers.
Buying and selling assets in U.S. dollars, the firm is largely insulated from forex volatility. Revesco acknowledges ongoing uncertainty in U.S.-Canada relations, but sees the American retail market as a promising destination for Canadian capital.
“Overall the growth trajectory for the U.S. economy appears to be extremely strong,” said Lee.
“The appetite for shopping centres is going to be very strong in 2025, primarily because it’s been overlooked in favour of other areas like, for example, multi-family or industrial, which have been the belle of the ball for several years,” he said.
REITS BEST HELD LONG-TERM
REITs may be the only practical way for retail investors to access international real estate, said Andrey Pavlov, finance professor with Simon Fraser University’s Beedie School of Business.
Pavlov said REITs are generally desirable for their ease of online trading, their liquidity and their usefulness as an inflation hedge.
Most jurisdictions give them favourable tax treatment as pass-through vehicles, and require them to pay out the vast majority of their cash flows. “I like that because it imposes discipline on the REITs,” Pavlov said.
On the other hand, REITs don’t always correlate with underlying real estate values in the short term, he said, so investors shouldn’t expect a quick buck when property markets heat up.
“Nobody really cares about investing and capturing returns quarter-over-quarter,” Pavlov said. “Most people want to capture the returns over a longer period of time, so in that respect, REITs work.”
