REIT idea

Real estate is often on Manitobans’ minds. It’s close to home, literally.

We must either pay rent for shelter or own a home. Both can stretch budgets these days. Yet ownership is a cornerstone of wealth because the principal residence exemption allows for long-term growth in home values tax-free.

It’s been a heck of an investment if you were lucky enough to get on board before prices soared. Consider the aggregate benchmark (typical dwelling) price of a home was about $199,000 in 2006 in Winnipeg. Today, it’s nearly $395,000.

That’s an increase of nearly 100 per cent.

Whether residential real estate experiences the same growth in the future remains to be seen, especially given current prices can stretch buyer affordability.

Still, fundamental conditions persist that make real estate a good investment: demand remains high and supply is still relatively low.

Even if you don’t own a home, you can still own real estate as an investment in a Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP) and even the First Home Savings Account (FHSA) for that future down payment on a home.

Investing in residential real estate is, however, challenging to put in your investment portfolio.

The best vehicle for individuals — without millions of dollars on hand — is a real estate investment trust (REIT). Think of REITs as real estate mutual funds, albeit many trade on stock exchanges.

REITs hold portfolios of commercial real estate properties focused on specific types like multifamily rental, industrial, retail, office and even seniors residences.

“Commercial real estate drivers are a bit different than residential,” says Colin Lynch, managing director and head of private markets at TD Asset Management, which includes real estate and commercial mortgages.

So while residential real estate has seen values rise dramatically, other sectors like office or industrial have seen values for some types decline or flatten amid and after the COVID-19 pandemic, says Lynch who manages institutional (i.e. pension plan) money.

Fundamentally, commercial real estate in aggregate may be counter-intuitively poised for more upside because rising interest rates, aimed at taming high inflation post-pandemic, hurt its values.

That occurred because rents earned from properties held in REITs, a portion of which are paid as distributions to investors, could not increase quickly enough to keep pace with inflation. As well, many REITs borrow to purchase holdings, so higher rates increase interest costs and reduce profits.

Yet the stage may be set for future growth for commercial real estate, especially sectors like office that were more affected by the pandemic.

“We believe there is a lot of value in publicly traded real estate today,” says Sam Sahn, managing partner and portfolio manager with Hazelview Investments.

Hazelview’s 2026 real estate outlook lays out why commercial real estate looks like a good investment. While rising interest rates hurt the asset class, at least at first, it actually improved the outlook long-term because it stymied new development, the report argues.

“New supply has been declining,” Sahn adds. The percentage of new supply as part of all global supply is at its lowest level since the mid-1990s and is expected to decline over the next two years, the report notes.

Yet demand is forecast to grow 3.6 times. This is good news for REITs — which hold existing properties and generally do not develop new ones.

As well, Hazelview’s report notes REITs have underperformed the broader stock market dramatically over the last half-decade: about 10 per cent return versus about 110 per cent. In the past, this underperformance has been followed by outperformance, it argues.

Choices are plenty to play the supply-demand imbalance. The TSX is a hotbed of choices, including a REIT focused on a sector of U.S. residential real estate that has limited supply and rising demand due to home affordability challenges. The Flagship Communities REIT invests in mobile home parks.

“We’re in an asset class where people want to move out of multifamily, but they can’t quite afford stick-built (townhome or single-family home) developments,” says Kurt Keeney, president and chief executive officer of Flagship Communities REIT.

Mobile homes provide an affordable alternative, he adds. That is especially so given supply in the resale housing and new homes markets is constrained. A key reason is 30-year term mortgages in the United States.

Many existing homeowners have been reluctant to sell to keep their low-rate mortgages signed onto during the pandemic. That has led to fewer listings for new buyers, adding to price inflation.

High labour, material and land costs also elevate new home prices. Many lower-income Americans, in turn, look to mobile homes for ownership. Yet this supply is limited, too, because many municipalities are loath to green-light new mobile home developments because these properties generally are property tax- exempt, Keeney says.

Flagship is poised to benefit from strong demand and limited supply growth. It has spent more than 30 years acquiring aging mobile parks, fixing them up and gradually increasing rents over several years, he says.

These supply-demand imbalances favourable to investors can be found across many geographies and sectors of commercial real estate today, Lynch says.

“If demand is so foundational, meaning as society, we will always need a place to live or do business, that is attractive to have in one’s investment portfolio.”

Joel Schlesinger is a Winnipeg-based freelance journalist.

joelschles@gmail.com