Residential Real EstateCMHC Promotes Canadian Apartments
According to research from the federal housing agency Canada Mortgage and
Housing Corporation (CMHC), existing Canadian income-generating apartment properties outperformed the majority of other Canadian real estate investments
in the nineties.
CMHC economist Joel Starkes, recently promoted to Treasury Officer in CMHC"s
Capital Markets, reports that apartment investments have offered investors
generally stable, positive returns and a volatility lower than stocks and bonds
over the past decade.
Canadian real estate generally took a beating during the recession in the early
nineties. Residential real estate values in most cities still remain below
prices seen in the late eighties. This residential pattern has cast an
undeserved pall over apartment investments, says Starkes. He refers to the new
CMHC report, "Understanding Private Rental Housing Investment in Canada," which
states that only Halifax, Nova Scotia, of the six major Canadian rental markets,
could support development returns of 15 percent or more. This report found
investment in existing rental housing to be more viable than new rental housing
in most markets.
Supply and demand is an important factor in apartment investment returns. The
Canadian demographic trend towards a reduced number of family households has
generally made residential real estate less attractive to investors, but trends
such as the increase in non-family households and the low affordability of
housing for younger Canadians have led to an increased demand for apartments
Typically, with apartment investments, less risky properties give lower returns.
However, Starkes says that, based on the Russell Apartment Index, in the last
year or so these investments have provided some investors with greater return
for less risk. Starkes suggests that apartment investments can provide diversity
to traditional asset portfolios.
Apartment properties have better risk profiles than other asset types because
these relatively-stable, long-term investments generate returns without large
swings in value. The downside is that these returns are restricted by rent
controls and local market conditions. Ontario"s new Tenant Protection Act may
lead to greater returns, particularly in Toronto"s traditionally tight rental
market.
"For someone looking to diversify and looking at the data only, investing in
existing apartment properties makes sense, but the work and the cost of
management are not included here," said Starkes in response to a question about
the actual potential of this type of investment. "This may not convince anyone
to jump into rental housing but they may decide it deserves a second look. They
may say, ‘It is something we can watch if this upward trend continues." There
are a lot of things other than the numbers that come into this."
Followup: For CMHC, visit http://www.cmhc-schl.gc.ca/ . To get the report, call the Canadian Housing Information Centre at 1-800-668-2642 or 613-748-2367.
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