Resilience and opportunities in Canada's shifting real-estate investment landscape

Equiton's Geoff Lang on the stability of multi-residential REITs amidst housing marketing uncertainty

Resilience and opportunities in Canada's shifting real-estate investment landscape

This article was produced in partnership with Equiton

Significant shifts in Canadian real-estate have reshaped the investing landscape heading into 2024. As these changes play out, Real Estate Investment Trusts (REITs) centered on multi-residential apartments continue to display strength, offering a beacon of hope in a fluid economic environment that has impacted many markets.

Rapid fluctuations in single-family housing, many investors’ benchmark for the relative strength of Canadian real estate, have been demoralizing amid interest-rate increases. Office, retail, and other asset types strongly linked to the now-stalled Canadian economy face near-term uncertainties of their own.

Though not completely immune to the same forces, multi-residential apartment REITs tend to have steady streams of rental income, manage diversified portfolios, and stand to benefit from the growing demand for housing solutions, says Geoff Lang, SVP Business Development at private real-estate firm Equiton. Their many advantages position them as a compelling option for investors exploring a tactical shift in response to evolving market conditions.

“Multi-residential apartment REITs have long been associated with stability and profitability in the world of alternative investments,” says Lang. He emphasizes that the property type has historically posted strong results through periods of uncertainty and experiences low correlation to the performance of other asset classes.

“Multi-residential has weathered all sorts of market conditions and rewarded investors in the process,” says Lang. “Reducing that volatility is exactly why investors look to the asset class.”

Rental market conditions

Lang is mindful of the macroeconomic forces impacting REITs of all stripes, especially regarding property acquisition strategies and the interest-rate environment. However, for firms with an established property portfolio, he adds, these variable market conditions could offer significant prospects for growth in the coming months.

Speaking through the lens of the Equiton Residential Income Fund Trust (Apartment Fund), Lang says he does not foresee the changing times necessitating a material shift from Equiton’s investment strategy thanks to the strength of its multi-residential focus. He points out that the asset class continues to benefit from substantial tailwinds like surging population growth, housing affordability issues, and supply-demand imbalances.

Nearly half of all recent household growth in Canada is attributed to rental households, according to Altus Group. This trend is now slightly moderating but remains strong due to changing demographics. “A shift in preferences towards renting, and the influx of recent immigrants also contributes to the growing demand for rental housing,” says Lang.

Multi-residential market dynamics

When asked about the key factors impacting the rental market in Canada, Lang highlights the classic scenario of limited supply and high demand and points out some advantages for multi-residential REITs. This situation provides an opportunity for careful tenant selection, which is crucial for maintaining consistent rent collection. The higher interest rate environment can also lead to more properties on the market, often at competitive prices, creating opportunities for some buyers like Equiton.

“These factors support our strategies. However, we must exercise caution in our property acquisitions, ensuring we don't pay excessively. While our approach is conservative, the market currently presents exceptional buying opportunities. Few funds have the capacity to actively seek properties like we do, but it's essential to consider the prevailing interest rate environment,” Lang says.

Continuity in a changing real estate environment

Equiton maintains its emphasis on strategic property acquisition within the Canadian market for its Apartment Fund. Lang explains their approach to investment, emphasizing a conservative strategy that avoids overpaying and stretching beyond their means.

He further details, “A recent acquisition in December 2023 illustrates our strategy's effectiveness. We assumed an existing mortgage at 2.28%, maturing in 2029. This demonstrates Equiton's proactive management style, where we leverage macroeconomic insights to identify properties with advantageous existing mortgages, ultimately benefiting both the Apartment Fund and our clients.”

Equiton's primary focus remains in Ontario and Alberta, driven by strong population growth and market expertise. Lang underscores the importance of strategic acquisitions rather than focusing on geographic diversification. The firm's approach is not to buy indiscriminately but to invest where it makes the most strategic sense.

“From our perspective, one of the key challenges in the market is identifying growth opportunities or recognizing revenue gaps. An imperative metric in evaluating a fund's portfolio is the potential for rent increases in the units being purchased. Typically, our average revenue gap to market is around 30%. One of our newly acquired properties exhibited a 45% revenue gap to market.

This indicates that, assuming other factors remain constant, we can unlock value by optimizing underutilized spaces to add additional units and renovating units and common areas, giving us the ability to reduce the rental gap to market. This adds strength to our portfolio,” says Lang.