There are two stories playing out in Canadian real estate today. More familiar to most is residential real estate—home sales in Canada have dropped off in the early part of 2019 and the national average sales price has also come down.1
On the other hand, in commercial real estate, rents are up and vacancies are lower than they have been in years.2 Both present unique challenges to Canadian investors who seek portfolio diversification using real estate assets.
Canadian housing is all over the place
Although February is typically a slow month for home sales, the Canadian Real Estate Association (CREA) says actual sales activity reached the lowest levels recorded in February since 2009. In B.C., Alberta, Newfoundland and Labrador, sales came in more than 20% below their 10-year average for the month.
Trends varied widely among the 17 regional housing markets that CREA tracks. In B.C., for example, it says prices decreased 6.1% in Greater Vancouver, but increased 7.7% elsewhere on Vancouver Island. Home prices were up throughout much of Ontario while home prices declined across the Prairies. Overall, the national average price for homes sold during the month was down 5.2% relative to sales numbers reported in February 2018.
Commercial real estate paints a different picture
Commercial real estate investors, meanwhile, have a very different picture and a very different set of variables to consider. In the 2019 Canada Real Estate Market Outlook, CBRE Canada3 says demand for commercial property has never been higher. They say commercial real estate investment broke a third consecutive annual record, reaching $49.3-billion in 2018, 68.3% above the 10-year average.
Office building vacancy rates are notably low. At 2.7%, CBRE says downtown Toronto's office vacancy rates are the lowest in North America since the second quarter of 2016. Vancouver's industrial hub is leading the world in rental rate growth thanks to strong demand for warehouse and distribution space, and five of Canada's ten largest cities have overall apartment vacancy rates below 2%.
Diversification and cash flow for your portfolio
Investing in either of these markets, by investing in physical property directly, or by investing in a real estate investment trust (REIT) can help to diversify your portfolio. Real estate as an investment can also offer some protection against inflation, it can potentially produce generous yields and with some investments, capital appreciation.
However, investing in these types of assets presents a unique set of challenges. A direct investment in physical property can be impractical for a lot of investors. REITs (typically invested in stable, fully leased properties in major cities) can generally provide predictable, low-risk, cash flows, but generally do not experience any significant capital appreciation.
Overall it can be difficult to find great value at this point in the real estate business cycle and for the average investor it can also be difficult to gain access to broader, global markets.
New opportunities with private real estate
Private real estate investment managers have access to markets that are much broader than what is typically available to the average retail investor in Canada. In addition to their ability to cast a wider net, they can also pursue active, alternative investment strategies that are difficult to achieve individually or within a publicly-traded REIT.
For example, alternative investment managers can create value in commercial real estate by increasing rents through renovations or by engaging better property management before selling properties to capture the value increase. Some managers may also pursue opportunistic strategies, preferring to invest in properties like vacant buildings or undeveloped land that require significant investment to realize their potential.
For this reason (among others—low correlations to traditional equity markets, meaningful diversification and attractive potential returns), large institutional investors have increasingly added alternative investments like private real estate to their portfolios.
If you have time for your investments to fully realize their potential, we're talking ten years or more, private real estate could be an attractive option to add to your portfolio too.
Tailoring a private real estate investment for you
MD recently launched the MD Platinum™ Global Real Estate Pool, a first for retail Canadian investors, designed specifically to provide Canadian physicians with exclusive access to global private real estate investments. We've partnered with world-class institutional asset manager Metropolitan Real Estate of the Carlyle Group to bring you the resources and know-how to succeed in this space.
Available for a limited time, the investment pool consists of office, industrial, retail, residential and hospitality properties that are primarily located in major U.S., Asian and European metropolitan areas.
The Pool requires clients to remain invested for a longer time period—10 years or more in this case—so that the managers have the opportunity to fully realize the value of their portfolio of properties. As previously mentioned, the managers could collect higher rents and realize some value as property prices rise more broadly, but opportunities like transforming underperforming assets, fixing broken capital structures, expanding and repositioning assets and otherwise finding value in the least efficient parts of the real estate market, all takes time.
Therefore private real estate investments are not for everyone. In this case, the product is designed for patient, long-term investors, who are looking to diversify their portfolios beyond standard public market offerings.
Current real estate conditions and investments in Canada may be challenging in different respects, but there are opportunities to be identified. Whether you prefer physical real estate, the stable income of REITs or an opportunistic strategy of global commercial properties, real estate can be an interesting alternative to hold in your portfolio.
For more information about real estate investments, MD solutions and how you can add them to your portfolio strategy, please contact your MD Advisor.
3The CBRE provides commercial real estate services including advisory, transactions, property management, capital market, global workplace solutions, valuation and research.
The information contained herein provides key information about the respective MD Platinum™ funds and is not intended to be taken by, and should not be taken by any individual recipient as investment advice, a recommendation to buy, hold or sell any security, or an offer to sell or a solicitation of offers to purchase any security. The Platinum funds described in this document are subject to additional terms and conditions set out in the Platinum Funds operative agreements and regulatory suitability requirements as considered by the MD Private Investment Counsel Portfolio Manager. The Platinum funds’ operative agreements will also set out additional information about the investment objective, terms and conditions of such fund, tax information and risk disclosure that are a material terms regarding a fund. Any investment in a fund would be speculative and would involve significant risks. The information and strategies presented here are not suitable for U.S. persons (citizens, residents or green card holders) or non-residents of Canada, or for situations involving such individuals. Employees of the MD Group of Companies are not authorized to make any determination of a client’s U.S. status or tax filing obligations, whether foreign or domestic. The fund is intended for individuals that are discretionary managed account clients of MD Private Investment Counsel an operating division of MD Financial Management Inc.
Management fees and expenses associated with investing in MD Platinum private funds may be higher than fees and expenses in public security funds. No guarantee or representation is made that any MD Platinum private investment fund offered will achieve its investment objective.
There are additional risks associated with investing in private investments that are not applicable to typical investments in the public securities markets. These risks include, but are not limited to, the following: private investment funds are speculative and involve a high degree of risk; an investor could lose all or a substantial amount of his or her investment; interests in private equity and private real estate investments are illiquid and there is no secondary market nor is one expected to develop for interests in such investments; there are significant restrictions on transferring private equity and private real estate investments; private equity and private real estate investments experience volatile performance; private equity and private real estate funds are often concentrated and lack diversification and regulatory oversight. Leverage may be employed, which can make investment performance volatile. Real estate investments are sensitive to factors such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand and a manager’s skill as well as credit risks and tax and regulatory requirements.
MD PlatinumTM is a trademark of The Bank of Nova Scotia, used under licence. MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies. For a detailed list of these companies, visit md.ca.
The information contained in this document is not intended to offer foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals. Incorporation guidance is limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Any tax-related information is applicable to Canadian residents only and is in accordance with current Canadian tax law including judicial and administrative interpretation. The information and strategies presented here may not be suitable for U.S. persons (citizens, residents or green card holders) or non-residents of Canada, or for situations involving such individuals.