Real estate prices in British Columbia, particularly in Metro Vancouver, are high. This has driven many people to consider investing in securities that are connected to or secured by real estate.
Examples of real estate securities include investments in real estate investment trusts (REITs) and mortgage investment corporations (MICs), among others. There are risks associated with investments in real estate securities, just as there are with any investment.
With this in mind, the BC Securities Commission (BCSC) has created a useful acronym to help you find out what’s REAL when it comes to real estate investing:
- R – Read and understand the disclosure and/or sale documents
- E – Evaluate the risks
- A – Ask for clarification
- L – Look for advice
Read and Understand the Disclosure and/or Sale Documents
Public and private businesses offer investments in real estate securities. For example, securities of REITs that are publicly listed on stock exchanges, can be traded through your advisor or a discount brokerage account. Publicly listed businesses are subject to ongoing disclosure requirements (e.g. quarterly financial statements, management discussion and analysis of results, material change reports) and BCSC oversight. When researching a publicly listed business, use SEDAR+ to find and read required disclosures about the business.
Businesses also offer real estate securities through the private capital market, relying on prospectus and registration exemptions to offer these securities to investors who meet certain criteria. For example, the most common prospectus exemptions include the accredited investor exemption and the offering memorandum (OM) exemption. OMs provide specific information about the investment and about the business, and information in OMs must not be misleading, but the BCSC does not review or approve OMs. When considering an OM investment, you are relying on the trustworthiness of the business’s managers, so doing your own due diligence is important.
Although private businesses must provide disclosures to rely on some prospectus exemptions, they do not have the ongoing disclosure requirements of public businesses. So, when investing in the private capital market, it is important to read and understand the disclosure you receive before you invest. This could be the only disclosure you will receive.
With this in mind, ensure that you always critically assess and understand the OM, and any other information about the investment that is available to you. It is also vital that you read the risk disclosure in the OM and understand what it means.
Evaluate the Risks
People often incorrectly infer that historical trends, for example, previous increases in real estate value, will continue into the future. Investing in real estate securities comes with risks, just like investing in the stock market comes with risks. Once you have read and thoroughly understand the nature of the investment, as with any other type of investment, it’s important to evaluate the risks associated with the investment.
Keep in mind that businesses only disclose the risks they believe are significant. They do not know your personal circumstances and the risks the investment may pose to you. You should always apply your own judgment when evaluating the investment, as economic crashes, wars, pandemics, inflation, interest rates, climate change, and many other risks could affect the value of your investment and your ability to sell all or part of your investment when needed.
Ask Questions for Clarification
Once you have read the information you received, make sure you understand it. It’s easy to get lost in the jargon when it comes to researching and evaluating whether an investment is right for you. Be aware that jargon may hide a sub-optimal business strategy or even a fraud. Do not participate in any investment, including any investment in real estate securities, unless you have a good understanding of the business and its risks.
If you are not sure, ask questions, and don’t hesitate to take more time to consider the investment or even to walk away. Don’t allow yourself to be rushed to make any investment decision or sign any documents until you have clarified what they mean.
Look for Advice
If you’re considering an investment in real estate securities, ensure that deal through a dealer that is registered with the BCSC.
If you use a registered dealer, they must provide an independent assessment that the investment is suitable for you. In addition, they should provide clarification about the investment and answer any questions you may have. Before you take advice, it’s important to know if the advice you are getting is coming from a qualified source. Conduct a background check to ensure your investment advisor is registered.
If you use a discount broker, consider seeking advice from someone who is independent of the investment, such as a lawyer or accountant.
For more information on how you can find out what’s REAL in real estate investing, visit our Private Real Estate Investing page.
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Contact Centre at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.