The world of real estate has been ablaze with both excitement and nervousness this year. As everyone is buzzing with speculation about what the future holds, investors are especially eager to find the holy grail of perfect time and property selection. That, of course, is no easy task. The question remains – is now the time to invest in real estate?
Despite the news of the market cooling down, the current situation provides an opportunity for those willing to take it.
Shifts in prices
In November, 2022 the benchmark home price plummeted to a staggering $794,000, dropping a whopping 1.4% (that’s -$10,900) in just one month. Fast forward to January 2023, and you won’t believe your eyes when you see that prices for single-family homes have plunged 17.8% (-$172,200) from their peak. Any way you look, you can see the Canadian real estate market is going through a major shift. Across the entire country, no market remains at its all-time high, and many are significantly lower. Many experts believe the correction is not over yet.
Single-family homes aren’t the only option
When you read about real estate news, most statistics are related to single-family homes. We are here to tell you there’s a whole other world out there! Even when the housing market takes a hit, multi-residential apartments have proven to be a wise investment, maintaining positive returns while single-family homes struggle to keep up.
Just check out the stats: during the housing crisis of 2008-2009, when house prices plummeted by almost 9%, apartments still managed to show a healthy return of 1.8%. And in 2022, when house prices fell by a whopping 15.4%, this specific sector outperformed yet again, with a fantastic return of 2.6%!
Plus, unlike single-family homes, Private Canadian Apartments have never had a negative return in over 35 years, making them a stable and reliable investment that’s not subject to the unpredictable swings of the stock market.
High demand for rental properties
Another sector of the industry that’s thriving? Rental market. As data by the Toronto Regional Real Estate Board (TRREB) shows, the average rent for a one-bedroom apartment has risen significantly – by 19 per cent to be exact (year-over-year in the fourth quarter of 2022). The same trend can be observed for two and three-bedroom apartments.
In the future, significant changes aren’t expected. The GTA is experiencing a surge in rental demand thanks to its rock-solid fundamentals, but the persistent supply shortage means fierce competition between potential renters, leading to sky-high rents. As a result, multi-residential apartments will most likely remain a hot commodity.
Commercial real estate – an excellent way to diversify your portfolio
Think of your investment portfolio as a garden. Just as a garden thrives when it’s filled with a diverse array of flowers and plants, your portfolio flourishes with a variety of assets. The bigger a portfolio gets, the more benefits it enjoys from additional asset diversification.
Here’s where commercial real estate comes in as an excellent solution. Investors with a high-value portfolio (at least $1 million) could benefit from having properties that behave differently from others (negative correlation) and provide long-term returns. More recently, that’s become important due to the rising interest rate environment.
Although commercial and residential real estate share certain similarities, such as the capacity to generate rental income and achieve capital gains or losses upon sale, they are typically differentiated by factors like unit cost, scale, complexity, diversity, potential rental/tenancy base, and the application of depreciation and carrying costs.
In essence, commercial real estate is generally considered to have higher entry barriers than residential real estate, yet it can be a more resilient and diversified investment option. There are two ways to invest in commercial real estate:
- Directly buying a property with co-investors or by yourself. This requires a lot of money, and your investment will be tied up in the property.
- Indirectly investing through property investment pools, where you buy shares instead of property. This requires less money but comes with higher management fees. It’s also easier to sell your shares if you need to access your money quickly.
[1] Private Canadian Apartments, MSCI/REALPAC Canada Quarterly Property Fund Index- Residential / MSCI Real Estate Analytics Portal