A lot of things come to mind when you mention real estate investment trusts: shopping malls, apartment buildings, office towers, even nursing homes and hospitals.
They all have one thing in common, though. They let small investors become landlords without the headaches associated with things like late rent cheques and broken laundry machines.
REITs have become especially popular among investors looking for income when the interest paid on bonds and money market funds is so low.
"We're in a low-interest rate environment right now," said Alfred Lee, investment strategist at BMO Asset Management. "So a lot of people are looking for yield, and REITs are one of the few investments that offers yield but you don't have to take on that much risk."
Of course, REITs suffered along with everything else in the devastating stock market downturn in 2008 and 2009. Since then, with the economic recovery, many have surged by double-digits over the past year alone, after factoring in their generous dividends.
"We're seeing increasing occupancies and rising rents, which will lead to higher net operating income," said Craig Leupold, president of Greet Street Advisors, a U.S.-based firm that provides research on REITs.
While the big gains have probably been made already with REITs, he estimates that 2011 through 2016 will see modestly improving fundamentals for the industry, driven by an improvement in the overall economy.
Apartment REITs in particular should do well with improvements in employment, especially for younger workers who aren't ready to buy a home.
For many investors, exchange-traded funds are the best way to gain exposure to the sector. ETFs look like mutual funds in that they hold a basket of stocks, yet they trade on stock exchanges throughout the day and their fees tend to be exceptionally low.
The big benefit of ETFs over individual holdings is that they provide diversification, which helps to limit the downside risk.
But REIT ETFs in particular are attractive for a number of other reasons. They provide exposure to an assortment of businesses, reducing the downside risk if a couple of them run into trouble – a big plus when you consider that many REITs tend to be relatively small.
They can also provide diversification across different geographies, which is key when you're investing in REITs because real estate lives and dies by local conditions. And finally, the low fees associated with ETFs (generally under 0.5 per cent) won't eat into one of the most attractive features of REITs: their distributable income.
There are a large number of ETFs to choose from, trading in the United States and Canada, with many of the most popular ones specializing in particular regions, rather than types of REITs.
State Street Global Advisors offers three funds. The SPDR Dow Jones International Real Estate ETF gives exposure to real estate-oriented companies outside the United States, and includes Canada's Brookfield Asset Management Inc. and Japan's Mitsui Fudosan Co. among its top holdings. It has a yield of 8.4 per cent and has returned 29.9 per cent over the past 12 months, to the end of May, according to fund rating company Lipper.
The SPDR Dow Jones REIT ETF consists of U.S. real estate investment trusts and includes mall-owner Simon Property Group Inc., Equity Residential and Vornado Realty Trust. It has a yield of 2.7 per cent and has returned 21.8 per cent over the past 12 months.
And if you want international and U.S. exposure, there is the SPDR Dow Jones Global Real Estate ETF. It has a yield of 6.5 per cent and has returned 25.6 per cent over the past 12 months.
"There is a big emphasis on global real estate," said Jeff Tjornehoj, head of Lipper Americas Research. "This is a good development, in my view, as investors without a good view on regional real estate values don't have to decide North America or Asia or Europe – they can have them all."
There are Canadian-specific offerings as well. Bank of Montreal recently launched the BMO Equal Weight REITs Index ETF, which began trading about a year ago. It has 18 holdings, including mall owner RioCan REIT, nursing home operator Extendicare REIT and residential owner Boardwalk REIT. It has a yield of 5.9 per cent, and has returned 32.5 per cent over the past year.
"When you invest in a REIT, a lot of its business is specific to its location," BMO's Mr. Lee said. "For a company that has most of its business on the West Coast, the economics of the business are different from a REIT that operates mostly in Ontario. ETFs are a good way to get broad exposure – especially for those investors who are bullish on real estate but don't have the time to research individual companies."
David Berman