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Real estate bubble? The wealthy see it differently

An apartment building in Vancouver.

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If you own property in an area where real estate values are rising, count yourself lucky. But if you are already wealthy, how should you negotiate the skyrocketing property prices in Canada's major cities?

Do high-net-worth Canadians consider themselves buyers, sellers or holders? The answer, it seems, is all of the above.

"The wealthy investors I know of who held individual properties around Toronto have exited over the years," says Dan Hallett, a vice-president with HighView Financial Group in Oakville, Ont.

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He notes that his clients' situations are unique, such as a well-to-do woman who sold a number of residential properties in the Greater Toronto Area after decades of ownership to simplify her affairs.

Other clients, younger investors "with lots of disposable income who are unsure or skeptical of the stock market," are buying into rental real estate but sidestepping the ultra-hot Toronto market. "They are buying, but in secondary and tertiary markets" on the GTA fringes, Mr. Hallett says.

Veteran real estate investor and author Don Campbell, who is also the founder of the Real Estate Investment Network, has seen a recent shift in the focus of high-net-worth investors.

"A decade ago it really was all about leverage and how best to grow the capital faster than the markets seemed to be providing. Then it became a focus of, 'What do I do with the capital I have accumulated to create income?'" That has resulted in a "hunt for yield" that can be seen in hot stock and property markets and alternative investments popular among the wealthy, he says.

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Mr. Campbell notes that many high-net-worth real estate investors have shifted their money to "multi-family properties in growing-population but less-high-profile areas," which also "provides them with value and ease of management, rather than speculating on single condos in hot markets."

As an added benefit, he says, this strategy insulates high-net-worth investors from the cyclical nature of hot markets.

If a property market gets too hot to find decent yield, such as we are witnessing in Toronto today, and it begins to slow or drop, people will still need a place to live, and this will drive increased rental demand, Mr. Campbell says.

He cites the "incredible low vacancy rates" for rental properties in cities such as Victoria, Vancouver and Toronto. "People are still moving there but are not yet in the position to purchase."

One key advantage that wealthier real estate investors have over those with more modest means is patience, observes Ludovic Siouffi, a portfolio manager with Canaccord Genuity Wealth Management in Vancouver.

"The wealthy and/or the more sophisticated investor understands that there are ups and downs to any market, whether that is real estate or stock portfolios, and they are somewhat immune to these massive spikes. They aren't dramatic and emotional about wanting to 'sell, sell, sell.'"

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For many years, Vancouver was unquestionably the country's hottest real estate market, buoyed in part by an influx of foreign investment. Regulations aimed at limiting real estate purchases have cooled the market somewhat, but Mr. Siouffi does not see that changing the strategy for most wealthy investors.

"Guys who are heavy in real estate and who have been heavy in real estate are always adding, regardless of the market conditions," he says. "It is expensive now, it was expensive five years ago and it was expensive five years before that."

That does not mean wealthy investors are not willing to take some profits off the table. Mr. Siouffi notes he recently had a conversation with one of his clients who has a portfolio of 10 properties and was looking to sell one of them and put the proceeds into the equity market.

"That is a conversation that I am having with some of my investors," he says.

The wealthy also are not immune to "falling in love" with an asset class that may have made them rich in the first place.

"There are some who are just hardcore real estate [investors], my parents included, who are well into their sixties," he says. "It doesn't matter what I show them, they will always just love real estate because they grew up in that generation."

One danger for real estate investors, whether wealthy or of modest means, says Mr. Siouffi, is that they underestimate the cost of ownership. Beyond the initial purchase price of a real estate asset, that includes legal and administrative fees, taxes and upkeep as well as time and attention.

"The costs are not necessarily transparent … versus an investment portfolio, whether it is mutual funds or stocks and bonds. With CRM2 [new investment-fee disclosure rules], you are now seeing exactly what you are paying. That doesn't exist with real estate. It is tough to compete with sometimes."

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