Will investors play real estate as a safe haven in 2016?

AACI | Vice President, The Regional Group of Companies Inc.
  • Jan. 13, 2016

We’re starting the year with oil prices that remain at record lows, stock market volatility, continued Middle East conflict and an activist Liberal government in Ottawa.

John ClarkWhat does this all mean for the Canadian real estate market in 2016 when combined with the demographic shifts in our population?

Volatility in the stock markets

Despite a decent start to the year, major markets finished 2015 largely where they began. In the short term, this volatility may leave many investors watching from the sidelines as they wait for signs that markets have hit bottom.

That leaves real estate opportunities an attractive alternative, provided they have strong fundamentals – location and potential end-user demand. Many categories of real estate in the VECTOM markets (Vancouver, Edmonton, Calgary, Toronto, Ottawa, Montreal) have shown continuing price increases over the past 15 years and this may continue.

Low commodity markets

Low commodity prices, particularly for oil, are having immediate and negative impacts on some real estate markets. The obvious examples are Calgary’s housing market, as well as any office market dominated by the petroleum industries.

Conversely, low oil prices will have a buoying effect on manufacturing that’s dependent on petroleum for inputs, both on the factory floor and in the transportation of raw materials and finished goods. Short- and near-term price advantages for manufacturers should have a stabilizing effect on vacancy rates in the sector.

That could result in higher lease rates for landlords, or at least reducing vacancy rates and reducing losses on vacant space.

Islam’s civil war

Continued conflict in the Middle East must be having a tremendous dampening effect on the desire of investors to consider any form of investment in the affected countries.

That leaves investors looking for safer havens to place their money. With stock markets in the doldrums, foreign investors may very well turn to Canadian real estate markets.

Continuing but perhaps bottomed-out interest rates

Low interest rates have driven real estate values for the last 15 years and there are no apparent rate increases on the horizon.

Relative interest rate stability and low borrowing costs, coupled with generally stable real estate markets in the VECTOM cities, continue to have a positive effect on equity returns for well-placed real estate.

Boomers shifting their spending habits

Baby boomers have passed their peak spending and borrowing years. Other than the youngest, who are now 50, most have paid off their mortgages, put their kids through school and hit the road to debt freedom.

This cohort of 10 million Canadians will be doing two things – quite a bit of saving, but also quite a bit of spending in areas where they haven’t spent before. Most of that spending will be on themselves and family.

What do people 50 to 70 years of age do? They travel, renovate houses, dote on their grandchildren and perhaps head south to retire.

Real estate markets that are attractive travel destinations, that are primed for big-box and high-end retail development, and that have quality leisure and entertainment options, are bound to provide profitable investment opportunities for years to come.

Fastest population growth in the G8

At the other end of the age spectrum, Canada has the fastest-growing population among G8 countries. Births continue to exceed deaths for total annual population growth from births and immigration of one per cent.

Most of this growth is taking place in the VECTOM cities, while the rural population continues to decline and many smaller communities across Canada struggle to survive the loss of anchor employers.

It’s a safe bet VECTOM residential real estate will show above-average increases in demand, with associated price increases. Unless Canadian manufacturing policy changes to support and encourage development in Small Town Canada, those communities outside VECTOM areas of influence will continue to flounder.

But if manufacturing does continue to re-shore, and if this process accelerates and includes those peripheral communities, long-suffering investors in these areas may finally see returns.

Carbon reductions and the end of coal

Alternative energy sources will be impacted by the drive to reduce carbon emissions and wean ourselves from coal. The challenge at this point is predicting the nature and scope of this impact. Astute real estate investors will keep their eyes open to see what are the better bets for the real estate where the next energy source gets processed.

The trick will be to bank on where R&D, manufacturing and delivery of next-gen energy sources will take place.

Impact of new federal fiscal policy

I’ve written recently about the economic uplift that could follow in various parts of the country with the spending commitments of the new Liberal government.

In each of the next three years, $10 billion will be pumped into infrastructure projects. Prime Minister Trudeau has also earmarked $6 billion for renewable energy projects over the next four years, with a plan to ramp that to almost $20 billion over 10 years.

Today’s infrastructure builds become tomorrow’s real estate investments. It remains to be seen where the Liberals will commit funding. Actual planning and construction, along with the fine details of interest to a savvy investor, will fall to the provincial and municipal levels of government.

There you have it

So what does all this mean for real estate in 2016? Investors will likely be looking for the stability available in many major urban markets across Canada. And in those markets depressed by negative forces, such as the decline in commodity prices, buying opportunities may emerge for some.

For the long term, savvy investors will be following shifting population trends and watching to see where government spending commitments fall.

To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.

John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

Read more

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