Download Is now a good time to be investing in real estate?

JULY 2016
Is now a good time to be
investing in real estate?
The majority of the headlines state that Canadian real estate is in a bubble, so is now a good time to be investing in real
estate? The good news is that statement really only applies to two markets, Vancouver and Toronto, and their residential
housing markets specifically. Those two markets have skewed the national numbers as places like Calgary, Regina and
Halifax have seen housing values decline.
A report in June by RBC showed that housing
affordability in Vancouver plummeted in the first quarter
to the lowest on record as prices surged 25% over the
past year. This is highlighted in the chart on the left,
which compares housing affordability in Canada’s major
cities. The truth is that housing remains affordable in
most Canadian cities, except Vancouver and Toronto.
The Vancouver statistics are even more shocking when
you consider the fact that in order to purchase a singlefamily detached home in today’s market it now requires
120% of the median household income to service home
ownership costs. RBC defines home ownership costs as
the cost of a mortgage (principal and interest), utilities
and property taxes. A measure of 50% for example
means that 50% of the typical household’s pre-tax income
goes to paying these expenses. This pace of appreciation
and unaffordability is often associated with expectations
of further gains rather than fundamentals. Or are there
other factors that are not being considered?
A recent Maclean’s article titled “How China’s affection
for Canada’s real estate is reshaping the nation’s housing
market well beyond Vancouver” cited numerous studies
Source: RBC Economics “Housing Trends and Affordability” June 2016
suggesting that a lot of the demand is coming from
mainland China. Locally we have been speaking about this for a few years so this is not new information, but the truth is
Canada does a very poor job at tracking buyer statistics. The Canada Mortgage Housing Corporation (CMHC) hopes to
shed some light on the situation later this year as it plans to produce a comprehensive buyer report by the fourth quarter.
It will be interesting to see the results of this report.
It may just be coincidence (likely not) that real estate values in Vancouver and Toronto appreciated sharply as the Canadian
dollar plummeted vs. global currencies including the US Dollar and the Chinese Yaun since 2014. A falling Canadian dollar
has made Canadian real estate much more affordable to foreign buyers. Canada is an attractive and safe place to invest with
a stable democratic government and a strong legal system. These reasons make Canadian real estate very appealing to
foreign buyers.
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JULY 2016
The owner occupied residential real estate market is only one sector or segment of the Canadian Real Estate Market. Some
of the more notable sectors include Office, Retail, Industrial, Hotel and Multi-Family Residential (apartments). Additionally,
Canada only represents a very small percentage of the USD$180 trillion¹ (end of 2013) global real estate market.
Real estate as an asset class has played a significant role in portfolios of individuals, pensions and institutional investors for
years. This is because real estate investments exhibit distinctive investment characteristics when compared to conventional
assets, such as stocks and bonds, particularly over long periods of time. Specifically, real estate investments exhibit low
correlation to other asset classes, provide a good inflation hedge and generates a regular income stream (in most cases).
One of the common misconceptions is that
real estate will perform poorly in a rising
interest rate environment. Central banks
raise interest rates to slow the economy
and curb inflation. A strong economy is
usually associated with low vacancy rates
and robust demand, putting upward
pressure on lease and rental rates. The
more net rental/operating income
generated by a property, the greater the
likelihood that the property will appreciate
in value. Timbercreek Asset Management
performed a study that looked at how
publicly-listed Real Estate Investment Trusts
performed during a rising interest rate
environment. The study identified eight
periods since 1975 where interest rates
meaningfully increased. In seven of the
eight time periods, REITs generated positive
absolute returns and averaged 14%
annualized over all time periods.
Source: Timbercreek Asset Management “The Opportunity of REITs: Thinking Beyond Stocks and Bonds”
To summarize, yes, we believe now is a good time to be investing in real estate. Aside from a couple of overvalued
segments of the Canadian market (which creates opportunities in the less expensive townhome and condo market), global
real estate remains attractive. Interest rates are expected to remain low in the foreseeable future and demand remains
strong, especially in multi-family housing.
The Alitis Private REIT is an actively managed multi-manager investment designed to provide access to high quality private
real estate. The REIT will focus primarily on private North American multi-family housing, which we believe is the most
stable real estate sector. In order to achieve the target 7 – 10% net of fee return, the REIT will own pre-existing income
producing properties as well invest in development/construction projects. The REIT may also invest in publicly listed REITs
globally as well as private debt. The launch of the Alitis Private REIT has been a success as we have raised just over
$12.4MM over the first three months. Talk to an Alitis Adviser today to learn more about this unique offering and the
benefits of investing in real estate.
Mitchell Prothman, CFA, CPA
Portfolio Manager, Alitis Investment Counsel
¹CFA Institute “The REIT Industry” and Savills Research
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Alitis Investment Committee
L-R: Terry Gwilliam, Emily Hofmann, Todd Blaseckie, Cecil Baldry-White, Mitchell Prothman, Kevin Kirkwood
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