Why Canadian Investors Are Turning to Alternative Assets Amid Economic Shifts

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Source: Equiton's apartment fund surpasses $1bn in assets

As economic cycles shift, Canadian investors are reevaluating their portfolios, particularly in light of the recent interest rate cuts by the Bank of Canada. These cuts represent a sharp reversal from the steady increases over the past few years, creating new opportunities in alternative investments. One asset class gaining significant traction is private Canadian multi-residential real estate. With an aging housing market, high property prices, and growing demand for rental units, private real estate offers both stability and growth potential, making it an attractive choice for those seeking refuge from market volatility.

A New Cycle of Opportunity in Alternative Investments

The Bank of Canada’s recent rate cuts have catalyzed a shift in investment strategies. When rates were rising, investors leaned heavily on traditional asset classes like equities and bonds despite their volatility. Now, with lower borrowing costs, alternative investments are gaining appeal. This new cycle presents an opportunity for investors to diversify into less conventional asset classes, such as private real estate, private equity, and infrastructure, which offer resilience against market instability.

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Private real estate investments, particularly in Canadian multi-residential units, are uniquely positioned in this environment. Multi-residential apartments are benefiting from strong macroeconomic tailwinds, including population growth, urbanization, and an increasing demand for rental housing. As homeownership becomes less affordable for many Canadians, the rental market continues to thrive. By investing in private real estate, investors can take advantage of this rising demand while benefiting from the potential for consistent, stable returns.

Why Canadian Private Real Estate Stands Out

The illiquidity of many alternative investments can be a deterrent for some investors, but private real estate, particularly in multi-residential apartment complexes, has proven to be a reliable and attractive option. Unlike other alternative assets, such as venture capital or hedge funds, which are more volatile and less predictable, Canadian multi-residential real estate offers a high degree of stability. This stability is supported by the strong fundamentals of the Canadian housing market, where demand for affordable rental units continues to outstrip supply.

Private real estate funds focusing on Canadian multi-residential properties have consistently delivered robust returns. These funds provide an opportunity for investors to benefit from both income generation and capital appreciation in a sector that continues to show growth. This combination of stability and performance is particularly appealing in a volatile financial environment.

Shifting Investor Sentiment: A Move Toward Stability

Investor sentiment has evolved alongside these economic shifts. The cautious optimism that defined the start of 2024 has turned into growing confidence following the Bank of Canada’s rate cuts. Lower interest rates reduce the cost of borrowing, spurring investments in sectors like real estate, which are heavily reliant on financing. As a result, private real estate funds are seeing increased interest from investors looking for more predictable, less volatile returns compared to traditional equities and bonds.

This shift toward stability is reflected in the growing allocation to alternative assets in Canadian portfolios. Investors are increasingly recognizing the importance of diversifying their portfolios with assets that are less correlated to the stock market. With equities facing increased volatility and fixed-income yields remaining low, alternatives such as private real estate provide a much-needed counterbalance.

Private real estate’s ability to deliver consistent, stable returns—combined with the opportunity for monthly liquidity—makes it particularly attractive. These funds have also taken innovative approaches, such as converting underutilized spaces into new rental units and addressing housing shortages while increasing property values. This hands-on management, which includes significant investments in capital improvements like energy-saving upgrades, ensures that the properties remain competitive and appealing to both investors and tenants.

How Investors Are Reallocating Capital to Alternatives

With the financial industry shifting toward alternative investments, investors are becoming more strategic about where they allocate their capital. In recent years, mutual fund companies have expanded their offerings to include more alternative products, signalling the growing demand for these investment vehicles. However, as with any investment, conducting due diligence is essential.

Before committing to any alternative investment, it is crucial to assess key factors such as performance metrics, risk profiles, and the experience of the management team. Investors should examine whether the financial statements and other key documents are readily accessible and transparent. They should also consider the types of distributions offered by the fund, the terms of any mortgages held within the portfolio, and the overall risk profile of the investment.

The performance of the investment team is equally important. Investors should seek out alternative funds with a track record of delivering consistent returns in both bull and bear markets. In the case of private real estate, it is essential to understand the management team's expertise in navigating the complexities of the real estate market, including property acquisition, tenant management, and asset appreciation.

Understanding the Wider Economic Landscape

While private real estate is positioned to benefit from the Bank of Canada’s recent rate cuts, the broader economic landscape also plays a critical role in shaping investment strategies. Lower interest rates typically lead to increased borrowing and spending, which can have a positive impact on real estate values. However, investors must remain vigilant, assessing how these changes may affect other asset classes and ensuring their portfolios remain diversified.

The potential for inflation remains a key consideration, as rising prices could erode the purchasing power of traditional investments. Alternative assets, including real estate and private equity, often serve as a hedge against inflation. By reallocating capital to these alternatives, investors can protect their portfolios from the negative effects of inflation while taking advantage of the growth potential offered by a low-interest-rate environment.

Long-Term Strategies for Navigating Uncertainty

The rate cuts by the Bank of Canada may signal a temporary shift in the economic landscape, but long-term investors must remain focused on their broader financial objectives. Incorporating private real estate and other alternatives into a diversified portfolio can provide the resilience needed to navigate future market fluctuations.

For Canadian investors, the appeal of private multi-residential real estate lies in its ability to generate steady income while offering the potential for capital appreciation. As housing affordability remains a challenge and rental demand continues to rise, the fundamentals driving this asset class remain strong. By diversifying into alternatives, investors can ensure their portfolios are well-positioned to weather economic uncertainty while capturing long-term growth opportunities.

Building a Path Forward for First-Time Homebuyers and Current Homeowners

In today’s real estate market, both first-time homebuyers and current homeowners face unique challenges. The combination of soaring housing prices, rising interest rates, and inflation has placed unprecedented pressure on homeownership, making it a less viable option for many.

First-time homebuyers should focus on building sufficient capital before diving into the housing market. Instead of rushing to purchase a home in a volatile market, they might consider investing in purpose-built multifamily rental apartments through private real estate investment trusts (REITs). This strategy allows them to participate in the thriving real estate sector while avoiding the risk of overstretching their finances on homeownership. As mortgage rates increase, the risk of being trapped in a depreciating asset becomes more real. Purpose-built multifamily apartments offer a way to benefit from the current rental property shortages and immigration trends driving demand without the financial burden of mortgage resets and declining home values.

Current homeowners may also benefit from considering a transition to renting and investing in private REITs. With mortgage rate resets expected to jump from as low as 1.95% to over 5% in the next two years, many homeowners will find themselves struggling to keep up with increased payments. Selling now, while home values are high, and investing the proceeds in multifamily rental apartments can provide a stable income stream while capitalizing on rental market shortages and the rising influx of immigrants. This approach provides flexibility, liquidity, and a way to preserve capital as homeownership is forecasted to decline.

Join Us For A Complimentary Webinar

To further explore these strategies, join me, Adrian C. Spitters, along with Klint Rodgers of Lankin Investments and experts from Axcess Capital Advisors, for a complimentary online webinar. Together, we will discuss how investing in private REITs and other alternative assets can offer resilience in uncertain times.

Register & Secure Your Spot: HERE

?? Date: Thursday, October 10, 2024

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This webinar is an opportunity to enhance your understanding of real estate investments and stay ahead of the curve as you make informed decisions for your financial future. We look forward to your participation!

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Disclaimer

The information provided is for educational purposes only and does not constitute financial, investment, legal, real estate, estate planning, wealth planning, financial planning, tax planning, insurance, or any other financial-related advice. It should not be viewed as a recommendation to buy, sell, or hold any financial products or assets. All investments, including stocks, bonds, private equity, private real estate, alternative assets, and precious metals, carry inherent risks, including loss of principal. Markets are unpredictable, and past performance does not guarantee future results. Diversification may reduce risk but does not ensure protection against loss. Real estate and precious metals are subject to market volatility, economic conditions, and illiquidity. Alternative investments, such as private equity, private real estate, and private debt, often involve complex legal structures, longer time horizons, and higher risk, requiring careful consideration and professional advice. Insurance, estate planning, wealth planning, real estate, and tax planning decisions, as well as any financial strategies, must be tailored to the unique circumstances, goals, and risk tolerance of each individual. Tax and legal implications vary by person and jurisdiction, and changes in laws can affect outcomes. It is crucial to consult with licensed financial, legal, tax, insurance, real estate, and mortgage professionals before making decisions. Forward-looking predictions are the opinion of the author and do not constitute financial advice. By using this information, you acknowledge it is general in nature and not a substitute for personalized advice, and you agree that the authors and affiliated entities are not liable for any financial losses or consequences from reliance on the content provided.

References:

1. Equiton Residential Income Fund Trust. (2023). Performance report.
2. Bank of Canada. (2024). Interest Rate Announcement.
3. Statistics Canada. (2024). Population Growth and Housing Affordability Trends.

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