Residential MICs did well in 2020, what does their future hold?

MIC firm COO on the risks and tailwinds these investment vehicles may encounter in 2021

Residential MICs did well in 2020, what does their future hold?

In spite of volatility across asset classes, 2020 has been a positive year for Mortgage Investment Corporations (MICs). These uniquely-Canadian investment vehicles benefitted from weakness in the fixed-income space as investors sought higher yields and, most importantly, the borrowers underpinning these products have broadly kept making their mortgage payments through the pandemic. But what may be in store for MICs when things stabilize?

Bryan Jaskolka, Chief Operating Officer of Canadian Mortgages Inc. (CMI), believes MICs - especially those focused on residential mortgages - are likely to continue performing well in the new year. Their mixture of volatility defence and income generation will continue to attract investors even if rates do go up, he says. And while this year’s COVID-19-induced instability has benefitted residential MICs, Jaskolka says in a post-COVID recovery, the mortgage market and MICs are set to continue their forward momentum.

“With vaccines soon coming to Canada -and likely being rolled out on a substantial basis in Q2 and Q3 -we will likely see growth and recovery in the commercial space. That should further support the recovery in the residential high-rise sector.” Jaskolka explained.

While there has been weakness in urban areas in 2020 as immigration effectively ceased due to the pandemic, as the disease begins to subside we’re set to return to steady and strong increases in immigration. In fact, immigration growth is poised to accelerate with the federal target rising to 390,000 net new immigrants in 2022.

“Both the general economic recovery that's projected to happen next year, as well as higher immigration, are going to be very positive for residential property specifically, but ultimately even commercial should benefit,” says Jaskolka.

While MICs without adequate credit controls could be at risk when government mortgage deferral programs end, Jaskolka stressed that the majority of mortgages underpinning CMI’s own MICs have been consistently paid by their holders. As well, the vast majority of mortgages with a higher debt to equity ratio have also been making their payments.

He added that the most persistent risk in the MIC space broadly tends to be on the commercial real estate side, which doesn’t have much impact on CMI’s predominantly residential-focused vehicles.

Jaskolka explained that CMI’s MICs have enjoyed a strong capital growth rates in the residential space. While CMI’s funds are more boutique, he says they sit within the “$500 million-plus” in private mortgages lent category. With one of the largest overall MIC asset managers and with a steady stream of origination, Jaskolka says that CMI can ensure the funds are constantly able to deploy the capital they’re raising.

While many MICs are spread out nationwide, Jaskolka said CMI’s lending has focused on two of Canada’s hottest housing markets: B.C. and Ontario. Both provinces have recently demonstrated strong housing fundamentals and incomes less disrupted by lockdowns than other provinces. However, CMI’s portfolio has avoided concentration in specific cities where weakness in the condo sector could make an impact.

Even as things stabilize and interest rates begin to rise, it will be a slow recovery as the effects of the pandemic linger. MICs are therefore not going anywhere, Jaskolka believes that an allocation to MICs will continue to be beneficial for investors looking for steady and fixed income components. MICs are designed to outperform traditional fixed-income products, and with a low-rate environment likely to continue into 2021 there will be a 4-9 point spread between MIC yields and Canadian government bonds.

While Jaskolka is confident in the 2021 outlook for MICs, he notes that Canadians are generally unfamiliar with the product and the risks involved, which means that “when advisors speak with their clients about MICs, there has to be an education component to that conversation.” Although investors are often intimidated or scared by something they see as new, the truth is that MICs have been around for close to 40 years, he notes.

“A MIC is not a new vehicle, and it’s a simple one to explain. It's a fixed income investment that pays monthly to the investor and the underlying portfolio assets are mortgage investments tied to people's homes. I think that when they really break down what we're doing, it's a pretty simple formula that’s built to last.”