Planning for your retirement can be overwhelming. The average Canadian investor is now enjoying a longer life and volatile equity markets and low interest rates may render their traditional investment choices (i.e. stocks and bonds) inapt at helping them achieve their retirement goals.

RRSPs continue to be one of the most significant tax-saving opportunities available to individual Canadians – and one of the most effective ways of saving for retirement.

You may have a rough idea of how RRSPs work, but do you have a grasp on how these investments fit into your overall financial plan?

Know your retirement investment options

Think of your RRSP like a big basket. Essentially, you can determine what goes in it.

Returns by asset class during the 2008 market downtown. For a full-size graphic click this link. (Courtesy Equiton)

Many investors are under the impression the traditional RRSP is limited to investments like mutual funds, GICs, stocks and bonds. However, there are other options available that could potentially enhance your RRSP.

If you have been losing sleep worrying about how the next public markets crises will impact your retirement savings, maybe it’s time to consider a more stable alternative like real estate investments.

Traditionally, in order to invest in real estate, you basically had to buy a property, rent it out, collect the rent, attempt to increase the value through renovations and then sell it for a tidy profit. That is a very time-consuming proposition and hard to diversify your risk since the more properties you buy, the greater your financial and time commitments become.

A more efficient option would be to invest in real estate investment trusts (REITs). This would give you the benefits of diversifying your portfolio into real estate without having to become a “landlord.”

Public versus private REITS

REITs are like mutual funds in that they pool investors’ funds and use it to purchase an underlying asset.

REIT funds are used to purchase and hold properties that produce income. REITs can be private or public.

Publicly traded REITs are traded like stocks on the stock exchange and therefore their value is tied to the price its shares trade on an exchange. This makes them more susceptible to being influenced by emotions (such as fear and greed) that often drive public markets.

On the other hand, unitholders of private REITs are largely insulated from broader market fluctuations, as their net asset value, not market sentiment, drives pricing and valuation.

To illustrate this meaningful difference let’s consider the 2008 financial crisis. During this time, the TSX fell approximately 33 per cent and the public REIT index fell approximately 38 per cent.

That year, the private apartment index experienced positive returns of 6.5 per cent.

A comparison of the returns of public vs. private REITS and Canadian equities. For a full-size graphic click this link. (Courtesy Equiton)

The impact on your RRSP would have been significant if your real estate investments were tied up in publicly traded REITS.

The second graph at right reveals returns on public REITs are more correlated to the returns of the broader equity market than to private real estate.

Therefore, adding private REITS to your RRSP should help to add stability by providing better diversification in comparison to public REITS.

Private income-producing RE investments

Canadian income-producing real estate (office, industrial, retail, multiresidential, etc.) has historically displayed low correlations to many of the traditional major asset classes, thereby providing investors with potentially valuable diversification benefits, such as improving both the efficiency of their investment portfolio and their risk-adjusted returns. 

In other words, when portfolio investments are efficient, investors may achieve higher levels of return for the same level of risk.

As well, using commercial real estate to diversify a portfolio may potentially generate more consistent returns. 

Commercial real estate has historically generated favourable absolute and relative total returns.

Total annual returns by asset class from 1988 through 2019. For a full-size graphic click this link. (Courtesy Equiton)

Over the past 31 years, multiresidential properties, the best performing of the primary real estate classes, outperformed Canadian bonds by over 60 per cent and Canadian equities by 13 per cent.

The lowest annual return for multiresidential properties was a positive 1.7 per cent return versus -0.17 per cent for Canadian bonds, -31.4 per cent for Canadian equities, and -41.4 per cent for emerging market equities.

The size of the bars in the graph above represent the range of annual returns recorded by each of the asset classes over the last 30 years.

The larger the bar, the larger the disparity was between the highest return and lowest returns achieved by the asset class.

In a volatile stock market, real estate can be a safe harbour. 

An investor with long-term goals should keep risk diversification and strategic asset allocation top of mind.

As an alternative investment with limited volatility, private equity real estate can help preserve retirement savings when financial markets come under stress.