Private REITs vs public REITs

The updated regulations in the private capital markets have given Canadian investors the ability to invest in some private real estate investment funds and REITs (real estate investment trusts) that offer attractive yields. 

For an investor who wants diversification away from the stock market, but does not want to go it alone in property investing or development, investing in a real estate fund is an avenue that is becoming increasingly popular. Until recently, investors had limited access to the private markets and were forced to buy publicly traded REITs. The differences between public and private REITs may be subtle, but their behaviour in the market can be as different as night and day, and that can impact price point.

“Publicly traded REITs are tied to the fear and greed in the market place; when the market suddenly reacts, your REIT is worth less,” says Clifford Fraser, Chief Operating Officer at Equiton. “People are starting to pay more attention to privately traded REITs because they realize their value is tied to the value of the buildings themselves. If we buy a building for $10 million and a few years later it is worth $12 million but the stock market crashes, our building is still worth $12 million. People are attracted to private REITS because they tend to reflect the reality of the real estate market place.”  

Investors in the private space also have the ability to cherry pick the particular real estate asset type that fits their specific need. Some REITs even mix asset types and combine commercial and industrial buildings or incorporate some lending-type investments. Although creating that mix has the potential to create higher returns, it also creates a risk-reward trade off that is unattractive to many investors.

“You take on a lot more risk with commercial and industrial buildings because they don’t perform the same way as an apartment, which is a  functional building of necessity,” Fraser says. “We have a growing population in the country that far outstrips the housing supply, so it is simple economics of supply and demand. Apartment or residential REITs are, therefore, lower down the risk spectrum, in comparison to commercial and industrial buildings.”