Are You Benefitting From Alternative Investments?

Published On: July 18, 2022Categories: Insights

With the recent volatility in the market and growing inflation, many investors are seeking out new strategies to generate stable income, preserve their capital, protect against market volatility, and achieve an attractive total return. This means a move away from the more traditional equity and fixed income investments and a move toward an alternative means of investing.

What are Alternative Investments?

Simply put, alternative investments are financial assets that don’t fit into conventional investment categories. They are investments in private companies and are not traded on an exchange/stock market and therefore aren’t subject to the constant price swings seen in the public markets.

Many investors are realizing that simply spreading their stock holdings across more geographic regions or sectors is not providing them with the diversification and true protection they seek. When things go wrong, the selloff in public equities is sharp and basically indiscriminate, meaning the vast majority of publicly traded stocks take a hit.

Private equity is a key type of alternative investment that has proven profitable even during times of stock market swings and downturns. Private real estate investment trusts (REITs) are prime examples of private equity designed to generate both stable income and consistent growth and are an excellent way to diversify your portfolio.

An Alternative Point of View

When looking for market insights about how to better protect their clients, one source to which investment professionals look is leading pension plans and endowment funds. After enduring numerous stock market crises, plan administrators found it was becoming harder to match their predictable payout streams with what was being generated by their traditional investments. They began to look for ways to significantly reduce the volatility of their portfolios in order to improve their ability to meet their future payout commitments. Over the last 20 years, CPP, OMERS, OTPP, CalPERS, Yale Endowment, and Harvard Endowment have substantially increased their relative holdings in real estate and other alternatives from 14% in 2005 to 42%A in 2020. These plans, which together manage more than CAD 1.7 Trillion, dramatically increased their allocations in alternative investments because they all recognized the significant benefits they offer. Following their lead, this trend has trickled down to investors who’ve realized that alternatives are an important part of a modern investment portfolio.

Private real estate, such as multi-residential properties, is a proven class of alternatives. It offers a unique investment opportunity and has the potential to create returns through three sources: consistent cash flows from operations; increases in equity from mortgage principal repayment (in a sense, the tenants buy the building for you); and potential increases in property value over time.

There are five key advantages that private multi-residential properties have over traditional investments.

  1. Higher Total Returns with Less Volatility: The performance of multi-residential properties is outlined in the Private Canadian Apartments index. Over the past 37 years, Private Canadian Apartments have not only outperformed Canadian Bonds and Canadian Equities by 45% and 5%, respectfully; they have never had a year in which their annual return was negative. The lowest annual return for Private Canadian Apartments from 1988-2021 was +1.7%, while the lowest annual return for Canadian Equities was -33%.
  1. Get Better Downside Protection: Private Canadian Apartments have provided investors with significant downside protection. While Private Canadian Apartments have never had a negative annual return, all major equity markets (Private Canadian Commercial Real Estate, Canadian Bonds, U.S. Equities, Global Equities, Canadian Equities, and Emerging Markets EquitiesB) have had numerous negative annual returns. Even during the Financial Crisis of 2008, the single worst year in global investing since the early 1930s, Private Canadian Apartments still posted a positive return of roughly 6%.
  1. A Proven Hedge Against Inflation: Over the last 44 years, commercial real estate in the U.S. has generally provided positive annual returns during periods in which inflation (as measured by the annual change in the Consumer Price Index) was over 4%. Due to the unavailability of data for the Canadian Private Apartment index prior to 1986, the private commercial real estate market in the U.S. acts as a surrogate for inflation analysis. Though the relationship between real estate and inflation should not be the primary factor for investment in real estate, it is a component worth considering within the context of the benefits of diversification to a multi-asset portfolio.
  1. A More Tax Efficient Way to Invest: Although dividends received from common/preferred shares are relatively more tax efficient than interest income, both may be significantly less tax efficient than distributions received from a private REIT whose return of capital is generally tax-free at the time of distribution and reduces the adjusted cost base of the investment, impacting how it’s treated upon sale/redemption. Private REITs generate tax effective cash flow which can be as high as a 100% return on capital. Over a 5-year holding period, taxes paid on a private REIT would be lower and could potentially be deferred until the investment is sold, unlike Canadian Common or Preferred Share and interest-bearing securities where the total taxes end up being considerably higherC.
  1. Preserve Capital: From an after-tax perspective, you would have to invest significantly more in a 6% interest bearing security or preferred/common share to generate the same $500 monthly after-tax income stream as an investor who had $100,000 in a private REIT. By choosing a private REIT to generate your required cash flow, you could free up a substantial amount of capital to be invested elsewhere, thereby potentially increasing the overall returns of your portfolio.

Augment Your Portfolio with Alternatives

As investors continue to grow increasingly wary of the constant volatility in the traditional public markets, they need alternative ways to generate stable income, preserve their capital, protect against market volatility, and achieve an attractive total return. All Canadians can now access the benefits of alternatives and Private Canadian Apartments through Equiton’s Apartment Fund. Through this Fund you reap all the benefits of alternatives, receive the yield from rental income and participate in the growth of the underlying properties without the hassles associated with becoming a landlord.

Introducing a New Way to Grow Your Wealth

As a leader in private real estate investments, Equiton has a variety of alternative investment solutions including two private REITs (Apartment Fund and Income & Development Fund) and now offers exclusive access to an exciting new development project that’s anticipated to generate a targeted annual net return of 20% (average based on 5.3-year project term). Sandstones Condo provides investors the opportunity to partner with Equiton in the development of a modern mid-rise condo in Toronto, minutes from the lake. With the ability to use existing registered funds to invest, it’s a great opportunity for Canadian investors.

Contact us today to learn how you can reap all the benefits of alternatives and invest in this exciting new development offering!

[A] Annual Reports for Canada Pension Plan Investment Board, Caisse de dépôt et placement du Québec, Ontario Teachers’ Pension Plan Board, British Columbia Investment, Management Corporation, Public Sector Pension Investment Board, Ontario Municipal Employees Retirement System, Alberta Investment Management Corp.

[B] Private Canadian Apartments = MSCI/REALPAC Canada Quarterly Property Fund Index- Residential / MSCI Real Estate Analytics Portal
Canadian Commercial Real Estate = MSCI/REALPAC Canada Quarterly Property Fund Index – All Properties / MSCI Real Estate Analytics Portal
Canadian Bonds = FTSE Canadian Universe Bond Index /
Canadian Equities = S&P/TSX Composite Total Return Index / Bloomberg
U.S. Equities = MSCI US Index / Bloomberg
Global Equities = MSCI World Index / MSCI Inc.
Emerging Market Equities = MSCI Emerging Market Index / MSCI Inc.

[C]  This assumes the REIT is 100% tax efficient, all distributions paid by the REIT are classified as Return of Capital, there is no capital appreciation in the shares of the REIT, and that at disposition the capital gain associated with the REIT is taxed at a 45% marginal tax rate.