Avenue Living: creating defensibility and stability for alternative investors

With a portfolio of real estate investments within the Prairies and beyond, the firm is building a long-term source of potentially stable returns

Avenue Living: creating defensibility and stability for alternative investors

This article was produced in partnership with Avenue Living Asset Management.

After a challenging 2022 for the public markets, Canada’s alternative investment space has seen an explosion of interest from advisors and their clients. For the equity sales team at Avenue Living, the appetite for more information and exposure has never been clearer.

“The interest in alternatives is increasing constantly,” says Alex Steele, head of National Sales at Avenue Living (pictured above, left). “We're getting emails, calls, and being asked to do seminars at a growing pace.”

That growing eagerness is hardly a surprise for Steele. Alternatives, or “alts”, have the potential to add stability and defensibility in portfolio construction – a must-have for portfolios amid turbulent markets. These qualities are specifically attractive to Canada’s large cohort of baby boomers, whose desire for consistent income streams is anticipated to increase over time.

“If you look at the specific categories we’re invested in — ‘hard assets’ and private real estate — we’ve seen consistent growth and improvement across the properties we manage,” he says. “The returns on our asset classes over the past five plus years have proven to be quite stable.”

Seeking stability outside public markets

With heavyweight institutional investors – including pension funds – ratcheting up their allocations towards private market alternatives significantly over the past decade, Steele says the case for portfolio stability through private market exposure is particularly compelling. Despite that, many advisors across Canada remain unfamiliar with the alternatives market.

“For the advising community, alternatives as an asset class are still relatively new, compared to say the traditional 60/40 portfolio,” says Steele. “That partly depends on which partners they’re working with and if they have been proactive about implementing these types of options and making REITs available for advisors in their network.”

According to Steele, many retail investors have been inclined to invest in traditional assets, such as publicly traded stocks and bonds, rather than explore alternatives in the private market, because of the perception that it’s easier to understand fair market pricing in the public space. However, in a world compelled by the latest technology, he argues the traditional rules for determining fair market prices may be less definitive.

“In today's public market — where price movements can be significantly driven by short-term trading sentiment and algorithms — asset valuations have arguably become more divorced, at least in the short term, from the underlying value,” says Gabriel Millard, senior vice president, Capital Markets – Equity & Research (pictured above, right). “On the private side, asset prices are determined on the basis of the underlying fundamentals, which can make alternatives attractive for certain investors.”

As a private market product, Avenue Living doesn’t necessarily contend with the same short-term fluctuations in investor sentiment that can sway prices and returns in the public space. That, coupled with the underlying fundamentals of real estate as a “hard asset” class, is generally well-understood to have the potential to provide diversification and stability for investor portfolios.

“When you think about your financial future, you're perhaps less worried about the impact that short-term price movements in the stock market may have on your portfolio,” Steele says. “With respect to real estate specifically, there are also a lot of barriers to new development at the moment, placing upward pressure on the demand for existing supply.”

Building defensibility beyond demographic trends

Looking at its portfolio of private real estate investments, Steele says the trend of positive net migration into the Prairies, particularly Alberta and Saskatchewan, has created a significant demand tailwind for Avenue Living’s portfolio of multi-family residential properties.

“With the Canadian government’s significant immigration push, we have more new Canadians coming into the country. And that means you have an increased population of people in need of housing,” says Millard. “We believe that there is a long runway for further success, where the changing demographics in Canada have the potential to fuel the growth of this investment class.”

Beyond those structural forces, Millard says it takes scale and scope for real estate investment firms to operate in today’s environment.

“Although there is upward pressure on rental pricing and rental demand within Canada right now, we're also seeing a lot of operators and developers experiencing challenges when it comes to materials and labour costs, supply chain issues, and financing availability,” he says. “We understand that some managers may be weathering some acute challenges. However, the vertically integrated platform and strong relationships, particularly with our financing partners, that Avenue Living has cultivated over the past 17 years has produced some of our best performing results on record.”

Aside from favourable access to long-term debt in Canada through CMHC and a mortgage book with over 90% fixed debt, Avenue Living has also built up a formidable force of skilled employees within its own operations. In contrast, Steele says some other managers with very strong assets have seen improvements in rental rates but have struggled at times to sufficiently offset increases in costs.

For Steele, Avenue Living’s ability to sustainably produce alpha comes down to something more fundamental.

“Part of what differentiates us is the fact that we care deeply about our residents … We care about making their rental experience exceptional, which entices more people to want to live with us and call an Avenue Living building home,” he says.

“We’ve been in this business since 2006, and I think we'll be able to maintain this defensible position because we all take professional pride in what we do: for our customers, for our investors, and for our employees.”

This commentary and the information contained herein are for educational and informational purposes only and do not constitute an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This article may contain forward-looking statements. Readers should refer to information contained on our website at https://www.avenuelivingam.com/forward-looking-statements for additional information regarding forward-looking statements and certain risks associated with them.