Why 'resilient' asset class is the ideal diversifier

Real estate sector often tarred with the same brush but firm says its expertise in private apartment space gives it an edge

Why 'resilient' asset class is the ideal diversifier

For investors, wading into the real estate market is often met with a sense of trepidation. Is it too hot? Too cold? Are we on the brink of another 2008 collapse? The mainstream media love a housing crisis headline.

Cliff Fraser, Chief Business Development Officer at Equiton, told WP that many people lump real estate together under the single-family umbrella. But what the more nuanced investor understands is that there are numerous subsets, with the differences between them coming into focus because of the impact of the pandemic.

Equiton focuses on the private apartment space through its flagship fund, the Equiton Residential Income Fund Trust, which invests in large-scale institutional grade apartment buildings across Canada and is available through the advisor channel. Launched in March 2016, Fraser said the growing fund pays monthly distributions, which can be very tax effective, and has monthly liquidity.

“It's an equity investment,” Fraser added. “It's not lending, it's not debt – it’s a pure apartment play.”

While there has been plenty of doom and gloom around rent – and some people have certainly been hit hard by the financial crisis – Fraser said the reported “rent anarchy” has not translated into its portfolio. Some apartments have had issues regarding deferred payments but the firm has worked to help tenants and things are returning to near normal, albeit with a degree of wariness about when the unemployment benefits run out.

Central to Equiton’s approach is picking the right assets in the right cities that are economically diversified, with tenant profiles that are either retirees or dual income. This means the investment is more insulated from downturns, while large-scale apartment buildings offer good tenant diversification.

Investing privately in apartments also means your money is less correlated to equity markets. Fraser told WP they don’t have the same volatility as public real estate.

He said: “This is not the kind of asset that moves up and down every single day - it moves up slowly over time. The private apartment asset class has never had a negative year in 30-plus years and even during Q1 and Q2, when we were in the thick of lockdown, the private apartment index, which is tracked by MSCI IPD, still had a positive first two quarters of the year.”

He added: “It’s a very resilient asset class because you get returns from monthly cash flow from the tenants and you get equity upside because the tenants, if you've got a mortgage on the building, are buying the building for you.

“Also, real estate tends to go up in value over time, so you get your return three ways. As long as you can be patient, you will make make money over time. It’s a great diversifier for advisors and a great way to get access to real estate without having to use your own cash. “

For advisors, Fraser said this allows clients to put money into an investment that will keep ticking along month after month, year after year in an asset class where the value is tied directly to the asset and not the sentiment of the market.

Many clients, he believes, will now start demanding something different from equities and bonds given the current environment but warned that an understanding of the sector is crucial.

“Even in what would be called the broader commercial real estate category, you've got strip malls taking a hit but if you've got a strip mall that has a liquor store, a beer store, and a grocery store, you're probably doing okay. If you’ve got a hair salon and a dentist, you might be in trouble as a landlord. “

He added: “It’s really important that the advisor is comfortable with the asset manager. If the asset manager has the right experience, they are going to know how to shepherd these assets through these kinds of crises.

“That's one of the things we have over our competition. We’ve cut our teeth in real estate, we haven't done anything else in our career. We've got a really good view on how to pick assets well and how to manage them and make money.

“It can be a very sexy asset class and it's had a very long run so people have made money in real estate, in spite of themselves. But when the rubber hits the road, did you buy it at the right price? Have you been managing it well? Are you still able to produce the returns for your clients and for your investors?

“That’s a unique feature about us. We’re all real estate experts here and we think that gives us an edge.”