Brice Scheschuk is a fan of investing in private real-estate securities. He likes that they don’t move in tandem with stock markets and can offer unique profit opportunities.
In his personal portfolio, he holds units in Central Condominium Real Estate Investment Trust, which owns 68 rental units in three downtown Toronto condo buildings. Helped by a hot housing market, the value of this private REIT has risen by about 40 per cent since its launch two years ago. It also pays a quarterly distribution.
“This REIT has performed spectacularly,” says the 47-year-old chief executive officer of the Toronto-based investment firm Globalive Capital Inc., which also owns units in the trust. “The condo REIT has a bunch of characteristics that I don’t think I could have replicated in the public markets.”
The REIT bought the condos at a discount to the market price from a “friendly developer” before the buildings were finished, and it also pays a low management fee to a third party, says Mr. Scheschuk. An analysis of the condo market indicated potential for strong price appreciation over five years.
The condo REIT is part of a growing world of private real-estate investments aimed mainly at higher-net-worth investors. Private REITs are known for providing regular income and potential growth, but investors still need to do their due diligence because they are sold by offering memorandum instead of a prospectus document reviewed by securities regulators.
Private REITs are similar to their publicly listed peers in that they can own properties such as apartments and shopping malls. The value of units of private REITS, however, are based on the appraised value of properties that are updated monthly or quarterly, while public REITs tend to fluctuate with the broader market. In 2008, the S&P/TSX Capped REIT Index sank nearly 40 per cent amid a global financial crisis.
Investing in less-volatile private REITs can improve portfolio diversification and provide enhanced income, but “it doesn’t mean that there isn’t risk,” says Dan Hallett, a vice-president who is responsible for manager research and portfolio construction at HighView Financial Group. “The disclosure or transparency may not be on par with a public REIT.”
Investors or financial advisors need to “read everything at their disposal and ask a lot of questions” to avoid governance troubles or fraud, says Mr. Hallett. “One of the things you would want to ask for is audited financials.”
A drawback with private REITs is that investors may not be able to sell their units quickly if they want or need the money, while “in a public REIT, you can get out almost instantly,” says Mr. Hallett. With private REITs, redemptions may require 30 days’ notice, and investors might need to pay fees.
In addition, private REITs may be closed to investors temporarily if they are not raising money to buy new buildings, says Mr. Hallett. “It just depends on timing.”
Private REITs are usually sold through investment advisors or exempt-market dealers licensed to sell non-prospectus offerings. Guelph, Ont.-based Skyline Wealth Management Inc., however, deals directly with investors only to sell its apartment, commercial and retail REITs.
REITs with a mutual-fund trust structure can be held in tax-sheltered vehicles, such as a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA). The rules for investing in private REITs vary by province.
There are no purchase limits for accredited investors who have a net worth of more than $5-million, $1-million in financial assets or earn more than $200,000 a year ($300,000 with a spouse). For non-accredited investors, net worth and income may dictate the amounts they can invest.
Some private REITs operate as long-term income-producing vehicles, while others may have an “exit strategy.” Mohawk Medical Properties REIT, for instance, was recently acquired by publicly listed Invesque Inc.
Some REITs may own properties in multiple sectors, such as apartment, commercial and retail, while others focus on a niche. Among apartment REITs, for example, investors will find vast differences. Centurion Apartment REIT, launched in 2003 by Toronto-based Centurion Asset Management Inc., and Equiton Residential Income Fund Trust, a REIT established in 2016 by Burlington, Ont.-based Equiton Capital Inc., take a mostly buy-and-hold approach.
Centurion Apartment REIT, which owns buildings across Canada, is capped most of the time but has reopened temporarily. “It’s almost impossible to buy buildings at good prices today,” laments Centurion chief executive officer Greg Romundt. “We are looking at opportunities in the United States.”
Jason Roque, CEO of Equiton, says that his firm’s REIT, which is open to investors, has so far bought seven buildings to renovate, manage more efficiently and raise rental income. “It can take three to five years to get to the point where you have pulled out all that unlocked value,” he says.
Meanwhile, Equiton has a new twist on portfolio diversification with its recently launched Equiton Balanced Real Estate Fund Trust. The fund plans to invest in a diversified mix of private North American real-estate assets, including income properties, development and construction projects and real-estate lending. “It’s like a one-stop shop,” says Mr. Roque.
Toronto-based Purpose Investments Inc. also recently jumped into the space by acquiring a stake in a management company operating the rebranded Purpose Alliance REIT, which focuses on buying and renovating houses in up-and-coming Toronto neighbourhoods. The REIT, which plans to expand to other cities, earns rental income from houses that already have or will be carved into apartment units.
“There are two opportunities when you are buying homes in unique, gentrified neighbourhoods,” says Purpose CEO Som Seif. “There is the capital or value appreciation over time, and a nice income opportunity from rental.”
Central Condominium REIT, which is not taking new money at the moment, has been a way for investors to ride a strong condo market without the hassle of owning an individual unit, says Devon Cranson, president of Toronto-based Cranson Capital, which launched the REIT in 2016.
“Multi-family [residential] is the best place to invest because everyone needs shelter,” he says. “We also told investors that, in three to five years, we would look to selling the condos in the market at a much higher price, roll it into a public REIT or sell them as a portfolio to someone. That’s the exit-strategy.”