What is a Real Estate Investment Trust (REIT)?
The landlords that control the rental market are not ‘Mom and Pop’ operations. They are large investment vehicles called financialized landlords.
The investment strategies employed by financialized landlords like REITs such as Minto and CAPREIT and asset management funds such as Starlight and Timbercreek are the same. They pool the financial resources of many investors and corner the rental market in order to dictate terms of rent and tenancy that inflate their profit margins. Each one of these corporations have targeted apartment buildings (called multi-family rental properties) with low-income tenants. They do this with the explicit intention of removing those tenants and replacing them with tenants paying hundreds of dollars more in rent each month. This investment strategy based on evictions and inflated rents is responsible for the crisis in rental housing we are currently facing. While COVID-19 has made this housing crisis worse for tenants, it makes the investments of financialized landlords more profitable.
A REIT is a vehicle for financial investment in real estate. REIT stands for Real Estate Investment Trust, and it gives investors a chance to profit from real estate without having to own or manage it directly. The REIT is managed by ‘operators’, who understand the real estate business. Operators create REITs because they want more money to grow their portfolios. Investors have money to invest and they want high returns. The REIT is a ’trust’ that allows investors to pool together their capital. This money is used by REIT managers to buy real estate, and using their expertise, they try to grow its value and deliver profits to investors.
Many REITs in Canada are publicly-traded on stock exchanges. This means that investors buy shares (called “units”) in a REIT, and the payouts they get each month are proportional to the number of units they hold. Investors in REITs are called unit holders (similar to shareholders). The managers of the REITs also get paid a fee and they often own shares (or units) in the REIT as well.
If a REIT is focused on acquiring multi-family apartment buildings, investor profits (or “unit holder” profits) come from tenant rents. Each month, when tenants in all the buildings pay rents (and other fees), the total is added up and shared among unit holders and the REIT managers. Investors enjoy REITs because they pay fewer taxes than with other investment vehicles. Real estate is also considered a good investment with strong “fundamentals.” With apartments, for example, people will always need somewhere to live. In Canada, there is an under-supply of affordable apartments, low vacancy rates, and high rents - especially in cities like Toronto.
This makes investing in apartment REITs very profitable, even in a pandemic.
How do they enhance value?
REIT managers drive value for investors in two ways. First, they can save on operating expenses - by running buildings more efficiently, saving on labour costs, harmonizing property management functions, buying in bulk, investing in efficiency upgrades. Second, they can raise more revenues - which come from tenant rents and other fees (laundry, parking, common area rentals, storage, etc.). When REIT managers buy a building they “add value” for investors by repositioning it to be more profitable. This means spending less while raising rents. Raising rents is the main business model for enhancing value.
Who are Investors?
Investors involve individuals and institutions that have extra money, which they would like to grow on their own. They invest this money in various enterprises and schemes, in the hopes of getting it back - but with a profit. Investors often want a certain level of return, sometimes they’ll take on risky investments to get high returns, or safe investments to get low but reliable returns.
Investors fall into a few categories. Individual rich people (called “retail investors”) may buy REIT units as part of their investment portfolio. Family offices (rich families) have lots of money and also invest in REITs and other financial vehicles. Institutional investors are large institutions that have vast pools of capital. Insurance companies and pensions funds are examples of institutional investors.
Are REITs different from other landlords?
Unlike ’traditional private companies or ‘Mom and Pop’ landlords, REITS are sophisticated financial vehicles. With access to vast pools of capital, REITs have greater powers to extract value from buildings that are not possible for smaller-scale actors. In addition, REITs have a single-minded objective, which is to grow profits and maximize value for shareholders. With these priorities, the importance of providing affordable, stable, or high-quality homes are subordinated to profit-making goals.
Financialized landlords like REITs are responsible for the significant changes we have seen in the Toronto rental market.
In 1993 the Federal government enabled the creation of REITs as new vehicles that would link investors to profitable opportunities in real estate. The first Canadian REITs were restructured from open-ended trusts and publicly listed on stock exchanges, allowing investors access to real estate as easily as buying a stock.
In 1997 and 1998, the first REITs to invest in multi-family rental housing were launched, at exactly the moment that the Province of Ontario set about to decontrol rents, deregulate tenant protections, and withdraw from social housing provision.
The first wave of financialization of Toronto’s multi-family rental housing sector was initiated to capitalize on the opportunities created by the collision of deregulation, downloading, and a spreading crisis in housing affordability among renters. Canadian Apartment Properties REIT (CAPREIT), Canada’s first multi-family REIT was launched in 1997. By 2015 it had become Toronto’s largest landlord (with at least 11,377 units in the City).