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Canadian apt. investments offer far smoother ride than major stock indexes

As the public market continues to face jarring swings, especially in the uncertainty of recent ye...

As the public market continues to face jarring swings, especially in the uncertainty of recent years, Canadian investors are increasingly turning to other investment opportunities to safeguard their wealth.

Even in the best of times, the stock market is defined by slow rises, sharp drops, and the constant threat of financial loss. For those feeling concerned and seeking alternative investments, Canadian apartment real estate provides all the benefits of stock indexes, but with far less risk.

Minimizing volatility

Volatility in the public markets has been an undeniable theme over the past two years. While some investors may be determined to ride out the whims of the market or are too nervous to explore new opportunities, others cannot afford to sit idly by while their retirement fund fluctuates rapidly from day-to-day.

For those seeking more reliable and dependable avenues, many have turned to real estate investment, which is usually defined by consistent and steady growth. Housing is uniquely important, being an intrinsic social necessity.

Multi-unit apartment buildings are particularly vital to society, no matter the current economic climate or societal context, giving them an edge as an investment asset.

This stands in contrast to major stock indexes, which are deeply affected by the rapid rises and falls of trends, technology and startup companies across more unpredictable sectors.

A recession-proof investment

Apartments consistently outperform other investment assets in a downturned economy, even within real estate.

Throughout the pandemic, for example, the office and hotel sectors were hit hard and commercial buildings suffered or closed down. In contrast, apartments have been comparatively unaffected, with only minimal vacancies.

Apartment ownership, in the form of private REITs and other private equity funds, offers a stable investment opportunity for just about anyone while still providing significant returns.

When an apartment building is built in the right geographic market and set up for long-term growth, it can provide positive and dependable returns.

Apartments are more in demand than ever

In addition to being naturally insulated from the dangers of the public market, apartments are in a uniquely strong position for future growth.

As home ownership is increasingly out of reach for many Canadians due to rising house costs, younger demographics are increasingly turning to apartment or condo living, especially in large urban centers and growing mid-sized cities.

Other long-term trends make it clear that apartment living will be the lifelong choice of many. Fewer couples are choosing to have children or expand their families, meaning less need for the extra space and additional rooms offered by a single-family home.

These young professionals are predisposed to urban apartment living, where they can advance their careers, work remotely and pursue hobbies without taking on the burdensome responsibilities of home ownership and maintenance.

The increased demand for apartments is also driven by rising immigration rates, with apartments being the most popular housing units for those new to the country.

With Canada having welcomed over 401,000 new permanent residents in 2021 (the most in a year in Canadian history), immigration will continue to foster a high need for apartments and rental units.

Finally, the demand is not exclusive to younger generations; on the other end of the spectrum, many older Canadians (“empty nesters”) are increasingly choosing to downsize to apartments in order to live off of the equity from their homes or to use that money for travel during retirement.

The benefits of private apartment REITs

Whereas in decades past, real estate may have been overlooked as a high-return asset class, it has certainly proven its worth over the years. Canadian apartment price value has increased steadily and significantly over time, accelerating greatly since 2016.

Of course, the success and growth of any individual apartment building will vary based on a number of factors; a building in a poor location with few amenities, or which is improperly maintained or managed, will lose much of its long-term profit dealing with high tenant turnover caused by resident dissatisfaction.

For this reason, it’s vital to invest only in buildings in great locations, with good property managers, and with high potential for growth over time. This is why many turn to private REITs, which are managed by professionals who handle all the administration and logistical concerns.

Comparing the returns of major stock indexes with those of successful private REITs reveals how these very different asset classes balance out and ultimately how private REITs win out in the long run.

In both the U.S. and Canada, even publicly-traded REITs have generally outperformed the stock market, especially over a longer timeframe. This is notable since these public REITs have the distinct disadvantage of being correlated with the market, meaning their valuation is affected by downslides and emotional volatility.

Looking at Canadian private REITs instead, especially multi-unit and apartment funds (which tend to be the best-performing REIT class), it is clear that there is even better performance and more consistent growth over time.

Private REITs offer less liquidity, so they’re best for long-term investment. For those willing to commit, their rate of return and potential for appreciation makes them an excellent choice for investing in Canadian apartment growth.

Private equity can help

With the above information in mind, it is clear that when done correctly and especially over a sufficiently long time, real estate can be a smooth and reliable asset class with risk-adjusted returns that are significantly higher than major stock indexes.

Instead of relying on the unpredictable public market, private real estate equity provides a very sensible alternative, allowing for more investing control, steady growth over time, and access to high-return real estate opportunities with little risk of volatility.

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