A bumpy road ahead
At the time of writing (July 13, 2022), the Bank of Canada had just announced a 100-basis-point hike to the interest rate, bringing the overall policy rate to 2.50%. Another hike is expected in September, with the figure expected to reach, conservatively, 3.75% by the end of the year. Inflation in Canada jumped to 7.7% in May 2022 and shows no sign of abating. The war in Ukraine, the lingering threat of COVID, heaving public markets, and disrupted supply chains all point to a bumpy road ahead.
La Belle Province is uniquely positioned to weather the storm
Québec, “La Belle Province”, is uniquely positioned to weather this storm. It demonstrated a high level of resilience throughout the COVID pandemic and bounced back faster than its Canadian peers, as well as the U.S. and the E.U.: its 2021 GDP growth of 5.6% surpassed Ontario’s (4.6%), Alberta’s (5.1%) and Canada’s (4.2%) as a whole.
This performance is, partially, the result of strong fiscal discipline, which led to record budgetary surpluses in the years leading up to the COVID pandemic and a reduced debt burden. The provincial economy, historically underpinned by the natural resource and manufacturing sectors, has significantly diversified in the last decade: A mix of public and private investments has led to the development of a world-class technology, AI, and digital arts community, a competitive pharmaceutical and bio-medical hub, and a strong entrepreneurial culture. A favourable regulatory environment, below-average operating costs, and a highly educated labour force have made it an attractive place for businesses: The Greater Montréal Area alone attracted $3.77 billion in foreign investment in 2021. Furthermore, through the Québec Infrastructure Plan, the government has committed over $140 billion to high-priority sectors such as health, education, and transportation.
Altogether, the unemployment rate of 4.3% is among the lowest across the country, 40% of the population has completed post-secondary education, and immigration is expected to skyrocket to a record high of 72,000 new permanent residents in 2022.
Québec real estate offers excellent investment opportunities
In spite of rising headwinds, this bodes well for real estate investments and those investors looking for affordable opportunities underpinned by secure fundamentals.
The province and its major investment markets, namely the Greater Montréal Area, Québec City and Gatineau, posted near-record levels of transactional activity in 2021: The GMA alone accounted for $8.7 billion, just behind Vancouver ($8.8 billion) and Toronto ($25.2 billion), the result of both pent-up demand in 2020 and a rebounding economy. This trend has persisted into 2022, with Montréal investment topping $4.4 billion as of June, just behind Toronto ($7.9 billion). Québec real estate investment across most asset classes continues to perform well and offers affordable opportunities compared to other Canadian markets.
If we look, for instance, at the performance of industrial assets: Across Canada, the changes in consumer demand generated a boom for e-commerce, 3PL and distribution real estate, driving up rents and applying downward pressure on vacancy. Vacancy remains lower in Vancouver (0.6%) and Toronto (0.8%); however, at 1.6% the GMA is not far behind. That said, GMA industrial rents average just $10.41 psf, compared to Toronto’s $14.27 psf and Vancouver’s $18.73 psf. Toronto industrial sells at an average of $300 psf while Montréal remains at a more conservative $200 psf. Thus, the GMA offers greater upside at a relatively more affordable cost.
A similar trend unfolds for multifamily investments. Québec is home to Canada’s largest rental market – Montréal – where 43.5% of the population choose to rent their primary residence. Since 2014, average rents have increased by 27%, representing an annual growth rate of 3.5%, a trend that remained true even through COVID. As of 2022, the return of in-person classes, international migration and tourism have driven vacancy down to 2.2% and rents now average $1,359. This is still well-below comparable markets across Canada, affording multifamily landlords with a unique opportunity to grow values in an established rental market: Toronto rents average $1,679 while Vancouver’s are $1,824.
And perhaps the most surprising development in the last two years has been the resilience of the retail sector: Daily needs and essential services performed at near-full occupancy throughout the pandemic. Furthermore, mall traffic and sales are up, pointing to an equilibrium between online and brick’n’mortar retail. With limited supply, landlords have begun reporting rental increases on renewals across all retail property types. Year-to-date, Québec has seen the most significant retail investment volumes across the country. Just in Montréal, $453 million has traded hands compared to Toronto’s $350 million.
Ultimately, given the overall performance of the Québec economy and the relative value of its real estate compared to its peers across the country, investors can benefit from excellent, risk-adjusted returns and long-term income growth, underpinned by solid macro-economic fundamentals.