Another attractive segment right now are retail REITs, which are inexpensive historically and are relatively undervalued; consider that they pay yields well above multifamily REITs. People are also increasingly getting back to their pre-COVID-19 lives, and that includes going out shopping. First Capital REIT and Crombie REIT are two firms in retail that look stable and solid.
Taken as a whole, the stock market is expensive right now. If the economy is weaker than expected, equities will fall even more than office REITs, which are cushioned by fat yields. Today’s dogs could easily become tomorrow’s stars.
REITs will continue to have price volatility. However, they do provide the investor with income and are an inflation hedge as landlords raise rents. REITs should have an allocation in all balanced portfolios, as they do not perfectly correlate with equities or bonds, thus increasing diversification and reducing portfolio volatility over the long run.
A smart approach is to be diversified and make sure to invest with trusts with strong balance sheets, including comfortable debt levels and low payout ratios. The iShares S&P/TSX Capped REIT Index ETF XRE-T gives the investor exposure to a diversified portfolio of names.
Tom Czitron is a former portfolio manager with more than four decades of investment experience, particularly in fixed income and asset mix strategy. He is a former lead manager of Royal Bank of Canada’s main bond fund.