How much real estate should you have in a balanced portfolio?


    Sage Advisors’ Toronto-based investment coach Aman Raina says, “At first glance, this should translate into higher valuations as rates remain near zero for the foreseeable future. However, there are some risks beneath this. “On the commercial side of office space,“ there are just too many unknowns about how companies will approach and / or welcome the return of employees to the office. Many are now re-evaluating their existing footprints to save space. Then there are many capital costs that could be viewed as health and safety (e.g. ventilation) space.

    Another unknown is retail real estate: “We saw how successful online retail was during the pandemic. Before COVID, there was consensus that the retail space was oversaturated. We could see an acceleration in the consolidation of retail space or a conversion to other uses that may not have higher rates. “The linchpin for more digital forms of commerce, however, will create more data center storage space and some interesting opportunities,” adds Raina.

    Most of the major ETF suppliers with a Canadian presence have broad-based, passively managed REITs, although there is at least one actively managed offering.

    The Canadian Cang REIT Index ETF Vanguard FTSE (ticker VRE / TSX) was launched in 2012 and has a modest MER of 0.39%. As the name suggests, each stake is limited to 25% of the total portfolio (usually this is the case) RioCan). The mix consists of 22% retail REITs, 19.8% office REITs, 18.5% real estate services, 18.5% residential REITs, 8.5% industrial REITs, 8.1% diversified REITs and 4.6 % Real estate ownership and development.

    An alternative is XRE, the iShares S & P / TSX Capped REIT Index ETF launched in 2020, which holds around 16 Canadian REITs and whose weighting is almost identical to that of VRE. The iShares product (from BlackRock Canada) has a slightly higher MER of 0.61%.

    A strong belief in home rentals might choose this Canadian Apartment Properties REIT (CAR.UN / TSX), a high quality growth REIT with half of its apartments and townhouses in Ontario. This has been expensive at times, so you may want to wait for a correction or just settle for a REIT ETF’s weighting on a broader basis.

    Note that VRE and XRE are both market weighted, but there is an equally weighted equivalent: the BMO Equal Weight REITs Index ETF (ZRE). Most of its holdings, as the fund’s name suggests, are equally weighted positions of 5T or 6% per holding. Compared to VRE or XRE, ZRE is relatively more exposed to industrial REITs (12.4% versus 5.23%) but less in private REITs (16.7% versus 25.72%).

    With the pandemic, some believe that the argument for using actively managed REIT ETFs instead of traditionally passively managed products like the ones mentioned above has increased. This is the approach taken by CI First Asset’s Canadian REIT Income Fund (RIT), which invests in REIT stocks as well as real estate companies and real estate-related services.


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