The chart below compares total returns, which measure each price appreciation and dividends reinvested, since 2016 across major Canadian and U.S. equity benchmarks.
While the S&P 500 and S&P/TSX 60 rose sharply, Canadian real estate investment trusts (REITs) lagged significantly behind. The distance has not decreased significantly either. Even with distributions being reinvested, the S&P/TSX Capped REIT Index stays well below its pre-COVID-19 highs and shows little sign of a sustained recovery.
I’m not a price investor or sector picker by nature, but divergences like this give me food for thought. Canadian REITs may quietly represent certainly one of the few asset classes that won’t overvalued today – and will offer real recovery potential in the approaching years, especially as rates of interest fall.
The irony is that despite the recent downturn in major cities like Toronto, many Canadians still see real estate as a path to financial independence after a long time of skyrocketing real estate prices. Still, few consider REITs that do the identical thing at scale and have diversification and liquidity that personal real estate holdings cannot match, especially when packaged into an exchange-traded fund (ETF).
The ABCs of Canadian REIT investing
REITs have their very own nuances that make them quite different from regular stocks. You cannot analyze them using the identical metrics you’d apply to an organization like Dollarama. Because REITs are vehicles: They are exempt from paying corporate tax so long as they distribute nearly all of their taxable income to shareholders.
In contrast to operating firms that earn a living through the sale of services or products, REITs generate their income primarily from rent. They own portfolios of income-producing properties and pass this rental income on to investors through distributions. These are typically paid monthly and are inclined to be higher than the common dividend yield of stocks in other sectors.
Canadian REITs span a wide range of sub-sectors including:
- Office: Properties rented to businesses and skilled firms
- Retail: Malls and standalone stores
- Reside: Apartment complexes and multi-family houses
- Industry: Warehouses, logistics centers and distribution centers
- Diversified: a mixture of several categories mentioned above
Because of the best way REITs work, you may’t value them using traditional metrics like earnings per share (EPS) or price-to-earnings ratio (P/E). In fact, these numbers on sites like Yahoo Finance or Google Finance may be misleading. That’s because REITs incur significant non-cash charges corresponding to depreciation and amortization, which may artificially depress reported earnings even when money flow is robust.
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The key metric for REITs is Funds from Operations (FFO). FFO adjusts net income by adding depreciation (which is a non-cash expense) and subtracting any gain or loss from property sales. Put simply, FFO is a more accurate measure of a REIT’s actual cash-generating ability.
Once FFO, you may calculate it Price to FFOthe REIT equivalent of a price-to-earnings ratio. Here’s how expensive a REIT is relative to its money flow. Comparing a REIT’s price-to-FFO ratio to its own historical average and to competitors inside the same subsector (e.g. residential real estate vs. residential real estate) provides a much fairer sense of value.
FFO can also be used to evaluate whether a REIT’s distribution is sustainable. Because REITs pay out nearly all of their earnings, the payout ratio is often based on a percentage of FFO quite than earnings. A lower payout ratio suggests more cushion to keep up distributions even during economic downturns.
Supporting FFO is the utilizationwhich measures how much of a REIT’s real estate portfolio is currently rented. Reporting is often quarterly and varies by sector. At the tip of 2025, occupancy in residential REITs continues to be at its highest, driven by housing demand, while office REITs proceed to face pressure from the distant work trend. Generally, you need to see 95% utilization or higher.
Another useful assessment tool is Net asset value (NAV) per sharewhich estimates the fair value of the underlying real estate of a REIT after liabilities. NAV divides the full estimated property value, minus debt, by the variety of stock units outstanding. A REIT’s market price may trade at a premium or discount to net asset value – there is not any guarantee it’s going to come close – but it surely’s still a very good reality check as as to whether a REIT appears undervalued.
The best place to search out these numbers is in a REIT’s quarterly reports and audited financial filings. Some data providers, corresponding to ALREITsCompile these metrics for many REITs listed in Canada.
Personally, I prefer REIT ETFs over choosing individual REITs. Properly valuing REITs requires in-depth knowledge of specific metrics. And while each REIT is internally diversified, most still deal with one property type or region. A REIT ETF spreads this exposure across multiple sectors and issuers, averaging risks and simplifying portfolio management.
In Canada, REIT ETFs generally fall into two camps: passive index trackers And Actively managed funds. Each has its strengths, and I’ll undergo a number of the more notable examples in each categories together with their benefits and drawbacks.
