Written by Daniel Da Costa at The Motley Fool Canada
In the current environment, with numerous undervalued stocks, real estate remains a top sector for long-term investments. While Canadians often think of rental properties first when they hear about investing in real estate, when you use the stock market to buy top Canadian REITs, you have the potential to invest in many different types of properties.
From self-storage units to seniors’ homes and malls to medical office buildings, there are a tonne of opportunities for investors to diversify their money in the high-potential real estate sector.
What are the best types of real estate to invest in?
Although there is lots of choice for investors, choosing the right subsector or sectors to invest in can be a crucial decision. Three of the most popular are residential, retail, and industrial.
Residential refers to properties used for living purposes, such as apartments and multifamily buildings. It’s typically the most popular sector where you can find many of the top Canadian REITs to buy.
Residential real estate is one of the best to buy because it’s one of the most defensive sectors in the entire economy, and, especially with Canada’s rapid population growth, it offers significant long-term growth potential.
Retail, which includes shopping malls, storefronts, and other commercial spaces, has always been a popular sector. Although, with e-commerce consistently growing in popularity and becoming more efficient, and with a potential recession on the horizon, retail REITs face significant headwinds in the current market environment.
Industrial real estate typically includes warehouses, factories, and distribution centres. The sector has been especially popular in recent years as e-commerce continues to grow in popularity, causing companies to close brick-and-mortar stores, which has driven an increase in demand for warehouses and distribution centres.
Interest rates are one of the biggest headwinds facing REITs
One of the biggest factors that has influenced how top Canadian REITs perform and which are the best to buy in this environment is their debt levels and how much their interest costs are increasing as rates have increased.
Real estate companies use leverage to improve the return on equity for investors. So, with rates increasing rapidly over the last year and a half, many REITs have seen rapidly increasing interest expenses.
Therefore, while finding stocks as cheap as possible is ideal, it’s essential to be aware of how higher interest rates may be affecting their profitability.
What are the top Canadian REITs to buy now?
In this environment, many REITs trade undervalued, creating a tonne of opportunity for investors. However, considering the heightened risks and uncertainty in the market today, to find the top stocks to buy now, it’s essential to find the highest quality REITs in Canada, but also ones that operate in the top industries. These are industries that are not only defensive but also offer long-term growth potential.
One of the top Canadian stocks on the market today that you can buy now and plan to hold for years is Canadian Apartment Properties REIT (TSX:CAR.UN).
CAPREIT, as it’s known, is the largest residential REIT in Canada and has over 65,000 sites and suites in its portfolio. This significant diversification helps to mitigate a tonne of risk, so it’s no wonder why CAPREIT has a long track record of resiliency and growth.
Plus, in addition to the capital gains potential it offers, CAPREIT also consistently increases the distribution it pays to investors.
So, with the top Canadian REIT trading at a forward price to adjusted funds from operations (P/AFFO) ratio of just 21.1 times, below its five-year average of 26 times, and with the REIT now offering a yield of 3.2%, it’s certainly one of the top stocks that Canadian investors can buy now.
In addition to CAPREIT, Granite REIT (TSX:GRT.UN) is an industrial REIT that’s seen significant growth over the past few years. And although that growth has slowed down as macroeconomic headwinds have increased, the REIT is now trading considerably cheap, offering investors a significant opportunity.
Granite now trades at a forward P/AFFO ratio of 15.9 times, below its five-year average of 19.8 times. Plus, the stock’s yield has risen to more than 4.6%. So if you’re looking for top Canadian REITs to buy now, Granite is another high-quality business you’ll want to consider.
Before you consider Canadian Apartment Properties, you'll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in November 2023... and Canadian Apartment Properties wasn't on the list.
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Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool recommends Granite Real Estate Investment Trust. The Motley Fool has a disclosure policy.