Commercial Real Estate Risk Mitigation Strategies for REITs

While REIT real estate investing in Canada offers many opportunities for those seeking a stable and reliable source of investment income, there are risks that must be managed. For example, economic conditions may determine whether or not tenants can pay rent. Oversupply of commercial space may erode rents. As well, governments have the ability to change zoning laws or taxes any time they please. All of these risks must be managed, and a good REIT management team should have strategies in place to deal with the following risks:

1. Property investment and management

Principal risks: Property values may decline, and properties may underperform.

Risk management strategy: A good management team will constantly review market conditions and measure performance in order to determine hold/sell recommendations.

2. Property development

Principal risks: Financing and access to capital, as well as project management challenges are the principal risks here.

Risk management strategy: Relationships with financial institutions must be managed, while projects must be closely monitored in order to ensure benchmarks are on time, and that budgets are not exceeded.

3. Taxes

Principal Risks: Taxes can change at any time. This includes property tax, sales tax, income tax, and how business entities are taxed.

Risk management strategy: A good REIT management team keeps its ear to the ground, and also communicates directly with government in order to keep on top of changes to the tax regime.

4. Mortgage rates

Principal risk: Changes in mortgage rates can affect cash available for distributions.

Risk management strategy: When interest rates appear likely to increase, the REIT management team arranges forward rate swaps as needed to mitigate the effect of interest rate increases.

5. Occupancy Rates

Principal risk: Higher vacancy rates mean fewer revenues, which in turn can result in smaller distributions to investors.

Risk management strategy: Commercial real estate properties must be managed to meet the needs of tenants. All services must add value, and a good management team constantly seeks and implements strategies to improve the customer experience, and as a result, property leases and rents.

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