With hefty inflation levels, investors are lining up to find investments that can weather the current economic conditions. Real estate has long been considered an inflation hedge since the value may increase in conjunction with other consumer prices. Also, rental income has the potential to increase with inflation as well. With that, it is essential to consider different real estate investment alternatives.

Overview of Real Estate Sub-sectors in Canada

Real estate is a tangible asset that includes owning the land and any attachments to the land, such as water, trees, minerals, and buildings. Real estate has long been a compelling investment due to its tangible aspect, predictable free cash flow, strong returns, tax advantages, and diversification from other asset classes.

Within real estate, though, there are specific sub-sectors with unique demand drivers that investors may want to consider.

Residential Real Estate

The residential real estate sector is focused on managing properties used as homes for individuals and families. This includes detached single-family homes, apartments, condominiums, and other planned residential unit developments.

Demographic trends and overall population growth drive this segment. During Covid-19, we saw a flight from city centers into suburban areas as many people lost the benefits of living closer to city centres due to pandemic restrictions. This increased the demand for single-family homes at the time.

Commercial Real Estate

The commercial real estate sector is focused on real estate that is used for business, whether this is shopping centers, retail spaces, office buildings, hotels, and other business developments.

This segment is driven by business confidence and consumer demand. When consumer demand and business confidence are high, there is more investment and growth in commercial real estate listings. With rising inflation and current economic uncertainties, there is a higher possibility of a slowdown within the commercial real estate segment.

Industrial Real Estate

The industrial real estate sector focuses on properties used for storage, manufacturing, and production. This includes factories, plants, and warehouses.

This segment is primarily driven by overall consumption levels, supply chain reconfiguration and e-commerce trends. The rise of e-commerce has led to a significant increase in the industrial real estate infrastructure needed to support e-commerce channels.

Other Real Estate

Other unique forms of real estate include data centers, farms, timberlands, and infrastructure projects. These real estate formats may have unique ownership structures and much different demand and supply conditions. For example, timberlands are a unique asset class given that they naturally grow over time, producing an increased yield from the deferral of cutting trees.

Ways to Invest in Real Estate via ETFs

Canadians can gain exposure to the real estate sector and its sub-sectors through the following ETFs/REITs.

It should be noted that REITs also have the benefit of being structured in a tax-advantaged trust format which requires the trust to pay out a minimum of 90% of taxable income as shareholder dividends each year.

XRE (iShares S&P/TSX Capped REIT Index ETF)

AUM: $997M 

Expense Ratio: 0.61%

YTD performance: -20.3%

VRE (Vanguard FTSE Canadian Capped REIT Index ETF)

AUM: $275M

Expense Ratio: 0.38%

YTD performance: -24.9%

CGR (iShares Global Real Estate Index ETF)

AUM: $216M 

Expense Ratio: 0.71%

YTD performance: -19.9%

Data for this article is as of June 23rd, 2022.

Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.