Investing

What's the catch with Real Estate REIT units?

  • Last Updated:
  • May 20th, 2017 12:26 pm
[OP]
Deal Fanatic
Feb 15, 2006
6665 posts
1300 upvotes
Toronto

What's the catch with Real Estate REIT units?

There are many of those xxx.UN trading on the TSE. Many pay 6-8% annualized of dividend. Many pay on a month basis.

It seems like very good holding if they can continue to give that type of (6-8%) dividend, while holding their original value.

What's the catch or downside in holding these?
42 replies
Member
Dec 2, 2014
360 posts
101 upvotes
London, ON
For some general information (both for and against):

5 Great Reasons to Invest in REITs
Why REITs Could be the Most Dangerous Income Investment

The knock against them that I've heard from more than one source is that you don't want to be overly invested in real estate. For people with mortgages a sizable percentage of your net-worth is tied to your home so to further invest into real estate, via a REIT, is cautioned. Someone better informed might have another take however.

I personally invest in XRE, a REIT ETF, as a lower risk option because I like the monthly dividend and balance out in other parts of my portfolio.
Last edited by StarScream1337 on Dec 19th, 2016 4:06 pm, edited 2 times in total.
Deal Fanatic
Mar 24, 2008
5060 posts
1145 upvotes
Toronto
When US stocks crashed 40-50% in 2008/9, some US REITS dropped by 80%. It's true that they pay monthly distributions but they seem to be pretty risky to me. On a different note, if you hold a broad market index fund like XIC, you already have exposure to these and buying REITS separately will tilt your portfolio and make it riskier than it needs to be.
Illegitimi non carborundum
Sr. Member
Apr 21, 2014
981 posts
216 upvotes
Alberta
It all depends on if you care about the share price or your goal is to live off dividend income. Share prices can signficantly change, REIT's tend to do poorly in a rising interest rate environment. However there earnings don't heavily change if they are invested in shopping centers etc. Take Riocan (REI-UN.to), I just took a look at their chart going back to 2011. In 2011 the share price was $26.43 and their dividend was 11.50 cents (yield of 5.2%), today their share price is actually lower at $26.16 and their dividend is 11.75 cents per month (yield 5.39%). So the share price hasn't gone anywhere, and their dividend has been pretty stable.

If you are planning on selling the shares to make money, they may not be a great investment. If you are planning on creating a dividend income portfolio they are decent (don't expect dividend increases, or significant growth in share price).

If the price does drop, you can buy more to increase the yield. Has there been any cut to their dividend???
Member
Oct 14, 2012
429 posts
182 upvotes
Woodstock
Please note that most REITs do not pay dividends, they pay distributions. The distribution is usually interest and sometimes return of capital. The distributions are not eligible for the dividend tax credit.

You may have to keep track of your ACB, adjusted cost base carefully if you hold REIT units in a non-registered account if there is any return of capital. (You don't have to in a registered account including a TFSA.)

A big risk is that the value of the REIT units may drop significantly and there is no guarantee they will go up again. That could happen as interest rates rise. It could also happen if something unexpected and significant happens to the holdings of the trust. For e.g. an earthquake or a major tenant for a commercial REIT going bankrupt (like when Target Canada closed everything.)

REITs are commonly used for income but I doubt many people would consider it safe to invest a huge % of their portfolio only in REITs.
Sr. Member
Apr 21, 2014
981 posts
216 upvotes
Alberta
Agreed. I hold some XRE in a TFSA to avoid ROC and knowing that it is treated as interest income.
[OP]
Deal Fanatic
Feb 15, 2006
6665 posts
1300 upvotes
Toronto
BetCrooks wrote:
Dec 20th, 2016 6:07 pm
Please note that most REITs do not pay dividends, they pay distributions. The distribution is usually interest and sometimes return of capital. The distributions are not eligible for the dividend tax credit.
How do you quickly tell (if they pay dividends or distribution)?

For example, looking at APR.UN, REF.UN, HR.UN, SRU.UN, AX.UN, BIP.UN, DRG.UN, NWH.UN.

Also CHR, EXE seem to have decent dividends.
Sr. Member
Apr 21, 2014
981 posts
216 upvotes
Alberta
Arrgh wrote:
Dec 20th, 2016 6:32 pm
How do you quickly tell (if they pay dividends or distribution)?

For example, looking at APR.UN, REF.UN, HR.UN, SRU.UN, AX.UN, BIP.UN, DRG.UN, NWH.UN.

Also CHR, EXE seem to have decent dividends.
Usually those with the UN ticker symbol have distributions rather than dividends, as they are not taxed at the source and are taxed in the hands of the Unit (UN) holder.
Jr. Member
Jul 29, 2010
144 posts
25 upvotes
ottawa
on a macro scale reits have some issues for me:
1) interest rates are rising as mentioned above making mortgage harder to carry. vancouver's house prices are in decline, it could happen in toronto.
2) commercial realestate is on the decline, more companies have remote workers even if they are in the same city, more retail stores are closing due to selling online. there are lots of ghost malls in the US, we'll see them in canada sometime soon.
3) 25% of canadian home "owners" have less than $1000 in the bank, ie they are a couple paycheques away from foreclosure.

that's a tonne of risk, and what's the reward, a measly 6% a year at best? investment grade short-term bonds are starting to approach that: same reward, much lower risk. i used to hold HR.UN earlier this year but since july the price has fallen 5%, almost equal to their payout.
Deal Addict
Aug 27, 2009
1094 posts
244 upvotes
Oakville
John Heinzl from the Globe and Mail is among the best investment reporters out there:
http://www.theglobeandmail.com/globe-in ... e33353721/


"I have been told by my accountant that distributions from real estate investment trusts (REITs) are taxed as regular income and at a much higher rate than dividend income. Could you please clarify this for me?

Your accountant is only partly right. Unlike many publicly traded Canadian corporations whose dividends qualify for the dividend tax credit, REIT distributions – they aren’t strictly dividends – often include several components such as capital gains, return of capital (also known as reduction of adjusted cost base), other income and foreign non-business income. The percentages vary depending on the particular REIT, but other income – which is taxed at your marginal rate – is often (but not always) the largest component. About 88 per cent of Canadian REIT’s total 2015 distributions, for example, were classified as other income. At RioCan, other income accounted for about 64 per cent of 2015 distributions. Capital gains are usually a smaller portion of the distribution and are effectively taxed at half your marginal rate, while return of capital is not taxed immediately but is deducted from your ACB. If you have questions about a particular REIT’s distributions, you can usually find detailed tax information on its website.

.
Deal Fanatic
Mar 24, 2008
5060 posts
1145 upvotes
Toronto
abc123yyz wrote:
Dec 20th, 2016 5:40 pm
It all depends on if you care about the share price or your goal is to live off dividend income. Share prices can signficantly change, REIT's tend to do poorly in a rising interest rate environment. However there earnings don't heavily change if they are invested in shopping centers etc. Take Riocan (REI-UN.to), I just took a look at their chart going back to 2011. In 2011 the share price was $26.43 and their dividend was 11.50 cents (yield of 5.2%), today their share price is actually lower at $26.16 and their dividend is 11.75 cents per month (yield 5.39%). So the share price hasn't gone anywhere, and their dividend has been pretty stable.

If you are planning on selling the shares to make money, they may not be a great investment. If you are planning on creating a dividend income portfolio they are decent (don't expect dividend increases, or significant growth in share price). ..
Using a hypothetical example, would you invest in a house that went down in value from 100k to 10k over 10 years and paid you 90k in rent? What did you really gain from such an investment?
Illegitimi non carborundum
Sr. Member
Feb 10, 2008
550 posts
210 upvotes
Toronto
ksgill wrote:
Dec 21st, 2016 9:36 am
Using a hypothetical example, would you invest in a house that went down in value from 100k to 10k over 10 years and paid you 90k in rent? What did you really gain from such an investment?
That's not a great example...more like investing in a house that went from 100k to 99k over 10 years and paid you $50k in that time. Sounds like a decent investment to me.
[OP]
Deal Fanatic
Feb 15, 2006
6665 posts
1300 upvotes
Toronto
ksgill wrote:
Dec 21st, 2016 9:36 am
Using a hypothetical example, would you invest in a house that went down in value from 100k to 10k over 10 years and paid you 90k in rent? What did you really gain from such an investment?
mrwally wrote:
Dec 21st, 2016 3:34 pm
That's not a great example...more like investing in a house that went from 100k to 99k over 10 years and paid you $50k in that time. Sounds like a decent investment to me.
Well, it can be more like investing in a house that went from 100k to 99k over 10 years and paid you $6-8k per year (or $60k-80k) in that time.
Deal Fanatic
Mar 24, 2008
5060 posts
1145 upvotes
Toronto
mrwally wrote:
Dec 21st, 2016 3:34 pm
That's not a great example...more like investing in a house that went from 100k to 99k over 10 years and paid you $50k in that time. Sounds like a decent investment to me.
If you do the math from your example, it's a terrible return! This is roughly a ~4.2% (100k compounded for 10 years @ 4.2% ends up @ 150,895) annual compounded return.
Arrgh wrote:
Dec 21st, 2016 3:39 pm
Well, it can be more like investing in a house that went from 100k to 99k over 10 years and paid you $6-8k per year (or $60k-80k) in that time.
See above, your return isn't much better at around 4.8%, hardly worth getting out of bed for. 10 year GICs in 2011 were paying 4.25% risk-free.

Hypothetical examples and maths aside, REITS act both as stocks (drop with the markets) and long term bonds (drop with rising interest rates). For me personally, the risk premium is just not there to invest in these securities beyond the exposure already provided by broad market indices. YMMV.
Illegitimi non carborundum

Top