Are You Considering Investing in Real Estate During Times of Economic Uncertainty?
Investing in real estate has long been considered a cornerstone of a diversified investment portfolio. However, economic uncertainty can shake the confidence of even the most seasoned investors. Given all the available investment opportunities, why should you still consider investing in real estate during times of economic uncertainty?
Understanding Economic Uncertainty
Economic uncertainty refers to a situation in which the future economic environment is difficult to predict. There is a high degree of risk and unknowns involved. This can be caused by a variety of factors, including political instability, changes in government policies, natural disasters, pandemics and market fluctuations. These periods often bring about market volatility, inflation, and changes in interest rates. These conditions all have different effects on different kinds of assets.
Factors to Consider When Evaluating Real Estate Investments
To make an informed investment decision there are many factors to consider. While investing in anything during times of economic uncertainty can be intimidating, investing in the real estate market has many points in its favour.
Housing is a Necessity:
The biggest strength of real estate is that it is always in demand. Everyone needs a place to live. Even during market turmoil, rental income does not tend to fluctuate or decline the same way stock prices do. For this reason, real estate is often considered a safe haven during times of economic uncertainty.
Tangible Asset:
Unlike stocks or bonds, real estate is a physical asset with intrinsic value that tends to endure through economic fluctuations.
Income Generation:
Properties can generate consistent rental income, which can be particularly valuable when other income sources are under pressure. During economic downturns, this income flow can be a vital source of financial stability.
Inflation Hedge:
Real estate often acts as a hedge against inflation. As prices rise, so can rents, which helps preserve and even grow the property’s value. This growth potential can preserve and even enhance an investor’s purchasing power.
Diversification:
There is low correlation between stocks and private real estate. Spreading your money across stocks, bonds, and real estate can enhance your portfolio’s diversification. This can reduce risk and increases the potential for returns by balancing the different performance and risk characteristics of these asset classes.
There are some factors that need to be more closely considered during economic uncertainty, but they can largely be mitigated with proper management.
Market Volatility:
Economic uncertainty can lead to fluctuations in property values. Lower demand and financing challenges can decrease property values, while tighter credit requirements can increase borrowing costs. Institutional investors can often negotiate longer mortgage terms, thus diminishing the possible effects of increased borrowing costs. To some extent, property values can be maintained through effective active management strategies that improve the building and make it more efficient.
Capitalization Rates (cap rates):
Cap rates are the most popular measure through which real estate investments are assessed for their profitability and return potential. Cap rates represent the yield of a property over a one-year time period. During economic uncertainty, the risk-return expectations of investors will cause cap rates to fluctuate, impacting property values. It’s important to remember that, when determining a property’s value, cap rates are only part of the equation. An increase in cap rates can result in a decrease in a property’s value, but only if Net Operating Income (NOI) is held constant.
Increased Operating Costs:
Rising costs of utilities, labour and materials due to inflation can increase your NOI thus affecting profit margins. In the multifamily space, NOI is driven by dynamic factors such as turnover, occupancy rates, rental increases, and operating efficiencies, which in turn can fluctuate depending on how a property is managed as well as market conditions. Through strategic management, real estate experts leverage methods of improving revenues within a portfolio to offset the effects of rising costs and cap rates.
The Strong Fundamentals of the Multifamily Market
Not all real estate is created equal but one asset type that weathers market fluctuations particularly well multifamily. Multifamily assets are often considered recession proof as rentals tend to become a preferred residential option during economic downturns given their lower cost and flexibility. In Canada, the lack of housing supply and the hardships associated with bringing new properties to market have provided the rental industry with tailwinds leading to strong market conditions. These are not likely to change in the foreseeable future.
Another key point in favour of multifamily real estate is that Private Canadian Apartments1 has never had a negative year of returns, even during the last six major market meltdowns. This includes Black Monday, The Asian Financial Crisis & Russian Bailout, The Tech Bubble, The Global Financial Crisis, COVID-19 and the recent Inflation Crisis. “The reliability of multifamily can help offset losses from other investments,” said Vice-President of Private Capital Markets Austin Rogers. “Investors can take advantage of real estate’s strong market fundamentals to generate cash flow during all market conditions.”
Equiton’s Strategic Approach
Investors in the Equiton Residential Income Fund Trust (Apartment Fund) have enjoyed consistently positive returns since inception in May 2016. Our expert investment strategy focuses on identifying properties where there is a significant difference between in-place rents and potential market rents, known as the “gap to market.” By strategically reinvesting in and improving these properties, we can increase rental income and the overall value of our properties.
The recent higher interest rates adversely impacted market cap rates which had a negative effect on property values. However, by leveraging our expertise to actively manage our properties, Equiton was able mitigate the negative impact of expanding cap rates and grew the fair value of our properties by 5.8% from Q2’22 to Q1’24. By growing our NOI by almost 20%, we more than offset the 13.2% impact of expanding cap rates.
“This demonstrates our commitment to optimizing operational efficiencies by reducing costs and maximizing revenue potential,” stated Michael Kowalczyk, Vice-President, Investment Finance & Asset Management. “We continually leverage our expertise to generate consistent value through the renovation of units on natural turnover, enhancing both functionality and marketability.”
Is It Good to Invest in Real Estate During Economic Uncertainty?
In conclusion, while economic uncertainty poses challenges, it also presents opportunities for savvy real estate investors. Ultimately, real estate remains a viable investment capable of providing stability and growth during periods of economic volatility. Even though it’s not completely immune to economic downturns, it tends to be more resilient than other economy-dependant assets.
Investors attempting to time the market to invest when rates become “ideal” are likely to be waiting a long time, missing out on years of potential growth. With Equiton’s proven strategies to create value and enhance NOI, real estate can be a good investment during any market conditions.
Contact us today to benefit from the expert strategies we apply to all our private real estate investment solutions.
1) MSCI/REALPAC Canada Quarterly Property Fund Index – Residential / MSCI Real Estate Analytics Portal
