The role of private real estate in diversified portfolios heading into a new economic cycle
This article was produced in partnership with Equiton
“We've gone from rising interest rates to now two successive decreases. That's a completely different cycle that we’ve just entered, and it's really positive for what we participate in—private Canadian apartments,” says Geoff Lang, SVP of Business Development at private equity real estate firm Equiton. This pivotal shift in the economic cycle underscores the growing relevance for stable alternative investments in today’s market climate.
With volatility and uncertainty shaping investment decisions, the balancing act between risk and return is crucial. Shifting capital towards certain types of alternatives is proving to be a strategic move, providing stability and growth potential.
Risks and rewards in alternative investments
When you're looking at common asset classes like equities and fixed income, there's daily liquidity, Lang further notes, “Risk tolerance varies significantly. Offering monthly liquidity provides investors with much more comfort when investing in alternatives, knowing that they have the option to liquidate their assets on a monthly basis, if necessary.”
Alternative investments often carry the stigma of high risk, driven by factors such as illiquidity and market dependence. However, private real estate presents a compelling exception. Unlike many alternative investments, private real estate investment trusts (REITs), like the Equiton Residential Income Fund Trust (Apartment Fund), can strike the right balance for the end investor, offering an investment solution with a proven track-record of stability, as well as the option for monthly liquidity.
“By understanding the lock-up periods, risk profiles, and targeted rates of return for alternative investments, both advisors and clients can better assess whether these investments make sense for their portfolios. You can assess that the chosen alternatives align with the clients’ needs and risk tolerance.”
Equiton’s Apartment Fund, Lang explains, focuses on Canadian multi-residential apartments, an asset class known for its stability and its strong tailwinds, such as population growth, challenges of home affordability and lack of supply.
Shifting investor sentiment and behaviour
Investor sentiment, too, is experiencing a shift. Reflecting on the recent changes, Lang notes, “There was cautious optimism at the beginning of this year. Now, with two rate cuts as of July, there’s a bit more calmness and growing optimism for the latter half of the year and into 2025.” The pivotal shift that the Bank of Canada’s recent rate cuts bring has the Equiton SVP expressing optimism.
In terms of portfolio allocation, incorporating alternative investments that consist of inherently stable asset classes can create a more resilient investment strategy. Equiton’s Apartment Fund continues to stand out due to its reliability and performance. Lang reflects on their recent performance, “We returned close to 12% last year (Class F DRIP as at December 31, 2023), and we're trending towards our targeted annual net return of 8%-12% this year.” This consistency underscores the value of Canadian multi-residential real estate in a diversified portfolio, providing a reliable counterbalance to more volatile asset classes.
Reallocating capital
Lang is a firm believer that every portfolio should have an allocation to alternatives. With more mutual fund companies launching alternative products, he sees this is the direction the industry is heading. However, he adds that conducting due diligence on the product and the investment team goes a long way.
“I want investors to take the time to assess the performance metrics. Are the financials easily accessible and listed on their website? Understanding the terms and maturity of mortgages, the type of distributions, and the fund's management practices is crucial. Do investors understand the risks of the investment?”
The immediate effects of the rate cuts on the Canadian housing market might not be obvious. In general, the Bank of Canada’s decision to cut interest rates could create new opportunities for investors. It is important to analyze the wider economic landscape, assess the potential impacts on diverse asset classes, and ensure that investment strategies remain aligned with long-term financial objectives while effectively managing associated risks.
