Seeing what others don’t in the private markets

Seeing what others don’t in the private markets

Seeing what others don’t in the private markets

Equiton’s website instantly tells you that “We see what others don’t”. It’s an eye-catching claim and one that cuts to the core of what this private capital market specialist sets out to achieve.

Emphasising the benefits of private equity and its separation from the emotional and systematic volatility of public stocks is very much Equiton’s calling card. Going private can provide the stability, diversification and returns an investor’s portfolio needs, especially with the public markets entering uncertain times.   

More specifically, Equiton CEO Jason Roque points to the advantages of investing in multi-residential properties and why private REITS can be a far safer route than its public counterparts.

With regards to multi-residential, he said that the Canadian multi-family sector continues to see strong net population growth, ever-rising homeownership costs and lagging supply of new apartment units.

“The stability of the sector has become increasingly enticing for investors given recent financial market volatility, economic uncertainty, near full occupancy and significant tenant demand,” he said.

“The sector is experiencing record low vacancy rates, rising rents and an unprecedented bargaining position for landlords.”

He added that demographics are also pointing towards a long-term increase in renting versus owning a home, with significant barriers to building new apartments, like rising cost and red tape.

Roque explained: “Developers are being constrained by record land prices, increasing development charges, rising material and labour costs, plus a prolonged and more involved planning and approval process.”

Overall, he said, there are favourable long-term trends that should contribute to the attractiveness and performance of well-managed private apartments.

If investors are looking for an indirect way to own real estate, Roque believes private REITS offer greater stability over public REITs, which are obviously influenced by the market.

He said: “As such, they are subjected to decrease in value because of the stock market noise, which may have nothing to do with the actual real estate and the values of the underlying properties.

“Over the past 14 years, the annual returns of the S&P/TSX Capped REIT Index were highly correlated to the annual returns of the overall Canadian equity markets. Therefore, adding publicly traded REITS to an investment portfolio, over the past 14 years, may not have provided true diversification and, as such, may not have improved the investment portfolio’s risk-adjusted returns or dampened its volatility.”

In fact, Roque pointed to a Wall Street Journal story that said when the economy tanks, REITS can get hit hard and that around the financial crisis in 2007 and 2008, REITS lost 15.7% and 37.7% respectively. The report added that after emerging market stock, public REITs are the second most volatile asset class.

Roque acknowledged the benefits of the liquidity of public REITs to the short-term investor but believes the long-term client is more focused on unlocking the value of underlying real estate and will place less importance on daily liquidity.

He added: “Moreover, as was the case in 2008, daily liquidity comes at potentially a very high cost since price discovery is based on external market mechanisms rather than the value of the underlying real estate. Even during normal market conditions, if enough investors decide to sell a public REIT or if a hedge fund decides to actively short a public REIT, the share price will be negatively impacted, although there may not have been any corresponding change to the value of the underlying real estate.

“Private REITs are meant to be a long-term investment and should be treated as a means to earn long-term cash flow and capital appreciation.”

Roque said that his team at Equiton has the skill and expertise to take advantage of the potential benefits of both multi-residential and private REITs, pointing to its active property management aimed at reducing expenses and increasing property values, and its team of real estate industry professionals with more than 100 years of relevant experience.

He added: “We have a proprietary pipeline that provides the acquisition team with the ability to acquire properties off-market and avoid the bid-up process that occurs when properties are publicly listed.

“We also have a strategy of acquiring assets below their intrinsic value, not only providing better than average upside potential, but also reducing any downside risk.”