Have investors given up on Real Estate?

Well the hangover is officially here.. 

Pick your headline: Hundreds of developers going belly up, Markets crashing in Vancouver and Toronto, rents falling 19 months in a row.. Oh my GOD!! Run for cover!!

From watching YouTube of some of the many ‘influencers’ you would think the world was coming to an end.  Far from it my friend!

Last week I wrote that multifamily values have peaked, and this is overwhelmingly true in most of the country right now.  Even apartment REITs are feeling the heat. For example Canadian Apartment Properties is currently trading at a 40% discount from its Net Asset Value. Many public REITs have been purchased by private ones as their valuations compared to the NAV are simply too low to ignore. 

It is my personal belief that the CMHC MLI Select product has artificially inflated the price of multifamily assets by as much as 30% or more.. With the crazy leverage of 95% loan to value on a 50 year amortization allowed many investors to get in way over their heads.  With CMHC continuing to move the goalposts, the same forces that created the massive lift are now working in reverse, and will for years to come. If you are investing in multifamily right now, this is critical to watch out for. Watch for another policy change this Monday, June 1st where it is widely expected there will be even more tightening on MLI Select policy, which would be another nail in the coffin to investors who literally bet the farm trusting the government of Canada to be a reliable business partner.  

So where is the opportunity right now?

If I was dying to invest in multifamily, I would purchase a heavily discounted REIT right now, but there remains risk due to very small CAP rate yields and heavy competition.  There are some value add deals right now, but the market is trading at a heavy premium right now. 

With the economic outlook of Canada improving, I believe that solid Canadian commercial real estate, particularly mixed use, industrial, and retail will the the dominant real estate play for several reasons:

  • Values have not been skewed by the exuberant financing offered by CMHC.
  • They trade on CAP rate, or the spread between the prevailing interest rate and their yield – making values much more dependent on income vs. speculation.
  • Upside for commercial real estate is looking extremely attractive in Alberta.
  • Less competition due to lease complexity, a much less ‘sexy’ asset class.
  • Better tenant profile – damage, violence, police visits are rare. 

Don’t get me wrong.  I likely won’t poo-poo on multifamily forever, but in the short term of the next couple of years, commercial real estate is going to be where the action is.  

I have a deal I will be bringing to market soon, with the opportunity for you to participate with fantastic upside.  More details coming soon!

What are your thoughts?  What type of real estate are you investing in right now or are you sitting on the sidelines?

Happy Investing!

Cory Sperle