Interest rates and market fluctuations have investors looking for alternative real estate exposure
4.4 million Canadians own a residential investment property, according to Royal LePage. When rates stayed low between the great financial crisis and 2022, those millions of Canadians were sold a dream of cashflow, rapid price appreciation, and the entrepreneurial dream of becoming a DIY property investor. That dream ran headfirst into the reality of renovations, maintenance, and tenant issues. Increasing interest rates have compounded those headaches and left many real estate investors asking their advisors for alternate investment avenues.
This is a moment when advisors and investors may want to consider professionally managed real estate investments. As property owners struggled with unforeseen costs, vacancy periods, and the capital required to make material value improvements, they may want to look at real estate exposures that are professionally managed. Private REIT investments are one such area that would allow these investors to retain their real estate exposure, with its cashflow and appreciation opportunity, but would allow them to alleviate the burdens of property management.
“Becoming a landlord was very popular during the COVID-19 pandemic when people were working from home and some even saving more,” says Geoff Lang, Senior Vice President of Business Development at Equiton. “Now more and more people don’t have the desire, time, or the extra capital to manage their properties. With a huge labour shortage in professionals who can help repair or renovate properties, investors are seeing less and less of the value in becoming a landlord that there was five or ten years ago.”
Private REITs, conversely, are built on the foundation of professional property management. When a tenant leaves a unit, a private REIT manager like Equiton can bring in contractors rapidly because they have longstanding relationships with those professionals. When they see underutilized spaces or the need for capital improvements, a private REIT can deploy capital immediately to make those improvements, because they have that capital on hand.
Due diligence in tenant selection is crucial, too. Lang cites Equiton as an example of good tenant management with a 98.5 per cent occupancy rate (as at December 31, 2023) for rent-ready units within its flagship fund—Equiton Residential Income Fund Trust (Apartment Fund). They have the know-how to assess tenant quality quickly and the scale to endure short periods without tenanted units. Unlike many ‘mom and pop’ landlords, who may not be able to manage a month without their unit being occupied, Equiton can ensure they find the right tenants, rather than being forced to accept the first application.
Access to institutional lending rates and other favourable lending terms can provide private REITs with a significant advantage over individuals. Lang notes that Equiton utilizes 10-year fixed mortgages, the majority of which are Canada Mortgage and Housing Corporation insured, for lasting stability. He contrasts this with the shorter-term mortgages many landlords locked in before and during the COVID-19 pandemic, which are now coming up for renewal at higher rates.
Lang is not advocating for divestment from real estate, far from it. He notes that Canada has very favourable tailwinds behind its rental housing sector, namely a constrained supply and high demand due to population growth. He says, though, that instead of accessing this trend through one or two capital and labour-intensive properties, Canadian investors and their advisors may want to consider an alternative in the form of private REITs with active management.
“It’s important for advisors to look at these exposures in the context of their clients’ financial plans,” Lang says. “Baby boomers approaching their retirement years can get a solid return as a passive real estate investor without having to do all the legwork that goes into managing your own investment properties. I think real estate is a very important part of a client’s portfolio, but it’s for advisors to ask their clients what their goals are, what their target returns are, and what they need for retirement. The answers to those questions may point away from being landlords towards alternative forms of real estate exposure.”
