The Burj Khalifa skyscraper is seen as the sun sets over the Gulf Arab state of Dubai. Investing globally in real estate is tempting, but one Canadian expert favours local real estate. “If you can touch it, stand on it, visit it, you know what you’re getting.”Mosab Omar/Reuters
Duddy Kravitz's grandfather put it this way: "A man without land is nothing." In today's ever-roiling economy, should men and women take his advice as it relates to investing in property?
The fictional character in Mordecai Richler's Canadian literary classic The Apprenticeship of Duddy Kravitz was talking about actual, physical property with dirt and trees. Today's sophisticated investor who is interested in real estate has a number of more abstract products and investment instruments to choose from.
Investors can consider everything from income-generating property and buildings, to development company stocks or bonds, funds or real estate investment trusts (REITs). And, while it's not necessarily recommended by the experts, they can look anywhere in the world to invest in real estate.
Should you invest in real estate? Is this a good time to do so? And if you decide to become a real estate investor, what's the best way to go about it?
"As a starting point, any investor should ask: Are you an active or a passive investor?" says Frank Margani, executive vice-president of Fortress Real Developments, headquartered in Richmond Hill, Ont.
"In the context of global real estate, it's particularly important."
While some people have higher tolerance for risk and a hunger for higher, though more speculative, returns, Mr. Margani paraphrases a principle of the organic food movement: Think locally before you act globally.
"I'm a believer in local real estate," he says. "If you can touch it, stand on it, visit it, you know what you're getting."
Mr. Margani says he believes in buying locally or regionally even for investors who aren't investing directly in a particular property. His company offers syndicated mortgage products – funds that investors buy into to create a pool of mortgage funds for specific development projects.
Worldwide real estate is tempting, admits Mr. Margani, who has experience in the property sectors in Dubai , among other places. There are opportunities in Brazil, for example, and even in recession-plagued Europe, industrial property in Germany has lots of potential upside.
"It's also true that there are strong markets around the world, and there are fantastic opportunities in certain parts of the United States," he says.
He cites U.S. regions where there is a strong national defence infrastructure – military bases, defence industries and all the services that go along with these.
But he still calls for caution.
"You really need the guidance of experts in these areas," he says. "It requires a high level of due diligence in those markets, by someone who can look at past investments there and see what they did."
He compares the U.S. real estate market to "a giant bear that's just waking up from hibernation." It may turn into a boom, "but most people would not want to wake up underneath a bear just as it's waking up."
REITs are a reasonable way to invest in real estate now, says Himalaya Jain, director of Canadian equities at ScotiaMcLeod's Portfolio Advisory Group in Toronto.
Real estate "is one of the sectors we're actually bullish on right now," and while REITs don't generally have high growth rates, they're relatively stable, Mr. Jain says.
"Even taking into account the recession of 2008 and 2009, REITs did very well. Very few had to cut dividends."
REITs tend to be solid, if unspectacular, in their growth because the real estate portfolios they own tend to be leased to tenants over the long term.
"The benefit is that when the economy becomes soft, you can also rely on those leases that are with creditworthy tenants," Mr. Jain says.
Nevertheless, REITs are tied closely to interest rates and bond rates, he adds. With recent announcements and signals from the U.S. Federal Reserve and the Bank of Canada, it looks like the outlook for short-term rates and long-term government bond yields can be expected to be stuck in neutral, Mr. Jain's Portfolio Advisory Group suggests.
Picking up on the buy locally theme, he notes that in retail commercial property there is now a mini-flurry of activity, with the announcement on Oct. 29 by Sears Canada that it is selling five of its leases in prime locations, including Toronto's flagship Eaton Centre.
This suggests that there will be competition and demand in higher-end retail space, as major department stores compete for good locations.
"The No. 1 rule in property is, and always has been: location, location, location," Mr. Jain says. This is as true for REITs and syndicated mortgage holders as it is for investors in individual properties.
Another thing to look at when investing in real estate, in any form, is the asset class, Mr. Jain says.
Many REITs focus on different asset classes, or types of property, he explains – for example: retail, office or industrial space, or multi-family units (apartment buildings), seniors' housing and lodging (hotels). Despite vast numbers of building cranes in markets such as Toronto, Vancouver or Calgary, there are relatively few rental apartments going up, because it's more worthwhile for developers to build condos, Mr. Jain says.
Mr. Margani says that when investors from around the world look for the best real estate investments, they often turn to Canada.
"We've got the G7's lowest debt-to-GDP ratio, the safest banks and Canada has led the G7 countries in growth," he says. "The 20-to-44 age group in Canada has a high rate of net migration [they're on the move] and that's a catalyst for economic growth. That's why investors are looking here."