Does Canadian real estate offer better portfolio stability?

TD's head of Global Real Estate Investments highlights the factors behind high quality of Canada's commercial space

Does Canadian real estate offer better portfolio stability?

For investors that want to diversify and protect their portfolios against the wild oscillations of the public markets, Canadian real estate could provide a high-quality source of long-term performance, according to TD Asset Management’s Head of Global Real Estate Investments.

“Real estate in Canada is amongst the highest-quality real estate in the world from a market perspective,” Colin Lynch told Wealth Professional in a recent interview.

While the real estate sector’s strength can also be impacted by other variable economic factors, Lynch says it also derives significant strength from demographic trends. The Canadian market, he says, benefits significantly from Canada’s pro-immigration policy, which creates significant demand for housing on top of raising productivity in the labour force.

Real estate investments also benefit from the perspective of stability. While there’s no challenging the role of stocks and bonds as mainstays in the average investor’s portfolio, the performance record of equity and bond markets can vary significantly depending on the period that’s being evaluated.

Looking at a six-month period versus a 12-month period, Lynch says, could spell the difference between a public market index being up 20% and being down 30%. And while asset prices can turn quickly in the public markets based on reports of earnings, policy declarations, and other headlines, the performance of real assets is a lot less elastic, thanks in part to the more patient nature of investors that allocate towards it.

“In the private real estate market, you have similar sets of institutional or individual owners transacting at a far lower frequency, with some transactions based off of valuations, discounted cash flows, and other factors,” he says.  

“There’s a lot more going on in the public markets, where aside from institutions, you have individual investors and computer-based algorithms driving and competing for investment flows.”

The other benefit in the Canadian context, Lynch says, is the high quality of the market. A survey of the different commercial real estate segments across Canada, he says, reveals many players that will benefit not just from tailwinds like the post-COVID reopening and the continued demand for e-commerce, but also due to the inherent strength of their portfolio holdings and the quality of their balance sheets.

“Now, that doesn't mean the market can't fall. Certainly, we would say there has been depreciation in the market,” he says. “But I would say from a fundamental perspective, we have a very strong outlook of demographic growth in Canada, which does provide a bit of a bastion of stability and long-term performance.”