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Canada’s goal of attracting 1.5 million immigrants during the next three years is acting as a powerful catalyst for the real estate investment trusts (REITs) that own apartments and multi-family rental accommodations.
Although interest rate increases during the past year have battered the sector, analysts say the panic selling was overdone and the future is bright given that demand for affordable housing is already far greater than the supply. The wave of immigration is intensifying the shortages, they add.
“It’s not an easy solution,” says Michael McNabb, portfolio manager with Purpose Investments Inc. in Toronto, of the supply-demand imbalance. “Frankly, there’s just not enough housing for all those people, which is why we have been increasing our weighting toward Canadian multi-family units.”
Mr. McNabb oversees Purpose Real Estate Income Fund PHR-T, which has $30.5-million in assets under management (AUM). In the past 18 months, he has increased the fund’s residential REIT component to 36 per cent of the total by adding Canadian names and reducing those in the U.S. sunbelt. Industrial REITs, which include warehousing, are its second-largest component.
Canada Mortgage and Housing Corp. (CHMC) highlighted the squeeze in its recent annual report. It noted that Canada’s apartment vacancy rate has dropped to 1.9 per cent – the lowest level in more than two decades. There’s particular stress in the largest markets including Toronto and Vancouver. The agency pointed to the influx of newcomers as one factor. Another is would-be home buyers who have abandoned their search in the face of high interest rates and continue to rent. A third is the demand from university students returning to in-person learning post-pandemic.
These pressures are boosting the bottom line of housing REITs. Rents are rising and the underlying properties they own are becoming more valuable as replacement costs are high and lead times are long.
Andrew Moffs, senior vice president and portfolio manager at Toronto-based Vision Capital Corp., a REIT specialist, also says housing supply and demand are out of sync. Mr. Moffs co-manages Vision Alternative Income Fund, an open-ended mutual fund that focuses on publicly traded real estate securities using a long-and short-selling approach.
The fund has $220-million in AUM with about 60 per cent of its holdings in Canada, 20 per cent in U.S., and the rest in Europe and Mexico. Almost two-thirds of the holdings are in single and multifamily REITs, with the next largest category being industrial and warehousing.
Focus on lower-cost centres
“Canada’s immigration plan is good for residential apartment REITs, but it’s going to mean different things for different landlords depending on where they’re situated,” Mr. Moffs says. “For example, Alberta doesn’t have rent control, so you’re able to charge market rents.”
Mr. Moffs says the top residential REIT holding in Vision Alternative Income Fund is Boardwalk REIT BEI-UN-T, which has 60 per cent of its portfolio in Alberta. He adds Alberta is benefiting from interprovincial migration because of its lower cost of living as well as attracting immigrants.
Both Mr. McNabb and Mr. Moffs like Ottawa-based InterRent REIT IIP-UN-T, whose 12,000 rental apartments are concentrated in major centres in Ontario. Mr. Moffs says InterRen’s strategy is to buy poorly managed, under-rented properties in strategic locations and gradually upgrade the units. It starts with common areas and then renovates individual units as they become available. Redoing kitchens and bathrooms allows the company to increase rents when units turnover.
Mr. McNabb notes that companies are becoming creative about how they develop new rental units. As land and building costs rise, InterRent, for example, is converting an Ottawa office building into apartments. Other REITs are adapting unused retail space.
Mr. McNabb says housing demand is widespread nationally but notes that Atlantic Canada has a particularly strong growth profile. In January, Statistics Canada highlighted this trend, reporting that Moncton and Halifax are the two fastest-growing Canadian urban centres.
To capture the growth on the East Coast, Purpose Real Estate Income Fund has increased its holdings in Killam Apartment REIT KMP-UN-T, which has a $4.8-billion real estate portfolio, the bulk of which comes from Atlantic Canada.
“You’re seeing a massive population movement, particularly to Nova Scotia and, to a lesser extent, New Brunswick, because they’re more affordable places to live,” Mr. McNabb says.
‘Extremely defensive’ sector
The S&P/TSX Capped REIT Index ended 2022 with a decline of 21 per cent, but has rebounded strongly with the recent rally. The index is up 9 per cent year-to-date.
The CMHC report “opened some eyes,” Mr. McNabb says.
Even after the recent run, the companies remain attractive and are trading below their five-to-seven-year average of price to cash flow, he says.
Both Mr. McNabb and Mr. Moffs say that as investors fret about recession, the sector has appeal because of its consistent cash flows, dividend streams and tight supply-demand equation.
“At the end of the day, the sector is extremely defensive. Everyone needs a place to live,” Mr. Moffs says.
Mr. McNabb adds that he is extremely bullish.
“It was an awful year last year, but [we feel] there’s an opportunity in a sector trading at a fairly sizable discount to its net asset value.”
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.
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