Despite the recent strength in real estate investment trusts, they still offer a compelling opportunity.
Real estate investment trusts, or REITs, have been market leaders this year. And they may continue to be winners, especially if the belief widens that inflation is on the rebound.
If you have a portfolio full of bonds, preferred shares and the most conservative of income trusts, you’re unwisely ignoring the threat of inflation. You may be right in the long haul, but you may be wrong. Can you afford to take that chance?
One security that brings some inflation protection while delivering an attractive current return is the REIT. Most forms of income-producing real estate include a significant degree of economic sensitivity. We’ve seen trouble in the retail segment (RioCan reduced its distribution), the office sector (H&R cut its distribution), and for a while back in early 2020, apartments REITs looked shaky before the government stepped in with support programs. Even residential real estate suffered early last year as the economy shut down due to the coronavirus. Real estate, quite simply, involves some risk.
But real estate does tend to produce steady, highly tax-advantaged cash flow over the years. It is, after all, a fundamental input to most forms of economic production. In this regard, then, real estate owners can fairly readily adjust their rents to inflation. There may be, typically, a five-year lag. But inflation escalators in renewal options are a standard part of most leases.
We recommend four REITs in our table of ‘Best Income Trusts for You’ which features trusts that should form the main building blocks of your income trust portfolio.
■ CAP REIT (TSX—CAR.UN) is Canada’s largest publicly-traded provider of rental housing. This REIT weathered the pandemic fairly well, thanks in large part to government support programs. Cash flow growth should be strong in coming years as immigration picks up and dorms at colleges and universities fill up. Buy.
■ Granite REIT (TSX—GRT.UN) owns and manages logistics, warehouse and industrial properties in North America and Europe. The increase in online shopping and supply-chain bottlenecks have increased demand for warehouse space and logistics expertise. Cash flow growth is expected to increase by double digits next year. Buy.
■ H&R REIT (TSX—HR.UN) owns interests in a North American portfolio of office, retail, industrial and residential properties. The office and retail sectors suffered under COVID-19, and growth in these areas should be less robust than in the apartment and industrial sectors these next couple of years. Buy for the long term as the REIT refocuses its operations.
■ RioCan REIT (TSX—REI.UN) owns, manages and develops retail-focused, increasingly mixed-use properties. The impact of the pandemic on retail REITs was hard and the sector has a moderate growth outlook over the next couple of years. But RioCan, with its mixed-use model that includes residential development, is better off than pure retail plays. Buy.
This is an edited version of an article that was originally published for subscribers in the October 29, 2021 issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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