Canadian (TSX) REITS Industry Analysis (2024)

FAQs

What is the 90% rule for REITs? ›

By law, REITs must distribute at least 90% of their taxable income to shareholders. This means most dividends investors receive are taxed as ordinary income at their marginal tax rates rather than lower qualified dividend rates. Any profit is subject to capital gains tax when investors sell REIT shares.

Canadian REITs have lagged the broader S&P/TSX market since the onset of the pandemic in March 2020 when Covid-19 lockdowns carved into the office commercial real estate sector and ensuing high interest rates weighed on real estate more broadly.

US real estate investment trust share prices continued to fall during the second quarter of 2024, underperforming the broader stock market. The Dow Jones Equity All REIT Index generated a total return of negative 0.9% for the quarter, compared to a 4.3% return for the S&P 500.

For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.

A REIT cannot be closely held. A REIT will be closely held if more than 50 percent of the value of its outstanding stock is owned directly or indirectly by or for five or fewer individuals at any point during the last half of the taxable year, (this is commonly referred to as the 5/50 test).

Choice Properties Real Estate Investment Trust, commonly referred to as Choice Properties, is a Canadian unincorporated, open-ended real estate investment trust (REIT) based in Toronto, Ontario. It is the largest real estate investment trust in Canada, with an enterprise value of $16 billion.

The stocks to consider

When it comes to crafting the perfect TFSA portfolio, having a mix of stability, growth, and income can make all the difference, and that's where Royal Bank of Canada (TSX:RY), SmartCentres REIT (TSX:SRU.UN), Sienna Senior Living (TSX:SIA), and Northland Power (TSX:NPI) come into play.

REIT bankruptcies have indeed been a rarity since the REIT debacle of the mid-1970s, when high leverage and highly speculative real estate investments resulted in numerous REIT failures.

Are REITs a good investment in 2024 in Canada? ›

With Canada's population expected to grow by 1.2% annually over the next five years, residential REITs are a good option for investors seeking stable returns.

Canadian REITs, on average, offer dividend yields ranging from 4% to 6%, which is higher than many traditional stocks. Beyond the steady income, Canadian REITs are diversified across various sectors, from residential to industrial properties. This reduces your risk and gives you a balanced portfolio.

REITs Outperform Stocks During Recessions

The stock market is extremely volatile during recessions. Publicly traded stocks rely heavily on the performance of the companies that are being traded in order to succeed. During a recession, those companies struggle, and their stock value drops.

Mortgage REITs were affected by the sharp rise in interest rates during 2022 and 2023, and again have been under pressure on the “higher for longer” news.

After lagging equities the past two years, REITs offer an attractive investment opportunity in 2024. The headwind of higher bond yields and central bank rate hikes is likely to abate and may turn into a tailwind if our view about an impending economic slowdown and decelerating inflation trends is correct.

Invest at least 75% of total assets in real estate, cash, or U.S. Treasurys. Derive at least 75% of gross income from rent, interest on mortgages that finance real estate, or real estate sales. Pay a minimum of 90% of their taxable income to their shareholders through dividends.

80-20 Rule: At least 80% of a REIT's asset value must be in completed and income-generating real estate, with the remaining 20% able to be invested in riskier assets such as under construction buildings, equity shares, bonds, cash, or under-construction commercial property.

To qualify as securities, REITs must payout at least 90% of their net earnings to shareholders as dividends. For that, REITs receive special tax treatment; unlike a typical corporation, they pay no corporate taxes on the earnings they payout.

30% Rule. This rule was introduced with the Tax Cut and Jobs Act (TCJA) and is part of Section 163(j) of the IRS Code. It states that a REIT may not deduct business interest expenses that exceed 30% of adjusted taxable income. REITs use debt financing, where the business interest expense comes in.