Canadian Property Market Going Full Throttle, But REITs are Losing Money

Published August 31, 2020 by Real Estate Leads

It’s always best to be cautious, and we agree with any consensus that it’s not good to jump the gun and proclaim the Real Estate Market in Canada as having come through the storm very little if any worse for wear. But we continue to see signs and real economic indicators that suggest the real estate market is going to continue to be one that’s on solid footing in Canada and that’s good news for everyone. Realtors are perhaps more likely than anyone to understand the ways people value the equity in their homes greatly, and that is of course often true because their homeowners themselves.

However, the ongoing Global Pandemic has take a real bite out of commercial real estate holdings, and investors in REITS (real estate investment trusts if you’re not familiar with the acronym) are taking a bit of a beating as the expression goes. What differentiates the residential real estate market from the commercial one is that the nature of homes being shelter means a degree of consistency with the supply / demand of things that doesn’t exist the same way for commercial.

Here at Real Estate Leads our online real estate lead generation system is an excellent way for realtors to be put more directly in touch with people who want to buy homes, pandemic or no pandemic, because they really genuinely need a place to live and raise families. But with the way the economy has slowed so much because of the lockdowns and other related influences, there’s nothing to counter the reduced demand for commercial space.

So what can we all be reading into this? Let’s consider that.

Back to the Regular Roar – For Homes at Least

Canada’s private real estate market is back in full swing again freezing briefly because of COVID-19, but its stock market equivalent isn’t enjoying the same revival. There’s no debating that home sales and prices in the nation’s biggest cities have rebounded sharply and everyone is very happy to see this. Even if we just look at Toronto, the average selling price for homes made a near 17% leap in July over the previous year, and more relevantly the national home price index climbed 7.4% itself.

That’s made many a homeowner looking to sell quite happy, but for investors who are getting their property exposure through equities it’s not such a rosy outlook at all. The iShares S&P/TSX Capped REIT ETF (which trades under XRE for the TSE) is down a full 23% this year, excluding dividends, and that has it underperforming its U.S. and global counterparts. As much as many would wish otherwise, the Canadian ETF is on pace for its worst year since the global financial crisis of 2008.

Too Long, Too Early

All of that is a result of too much exposure in the wrong places. Canada’s commercial real estate sector did extremely well in the decade after the financial crisis, with global investors jumping at every chace to invest in urban office buildings and bidding up on them like it was no big thing.

Strong consumer spending was making shopping centres valuable, and that always boost production of consumer goods in manufacturing too.

But there’s a degree of interference at play in the declines of commercial real estate values in Canada, and especially in Toronto if you speak to those in the know there. They say the rental system in Ontario has shifted the balance of power in favour of tenants, making problems that existed long before the pandemic worse, and then there’s how many building owners and landlords are not claiming CECRA emergency commercial rent relief from the feds with the idea that eventually getting tenants will mean getting better value when renting the properties.

But either way, what we have now is the coronavirus pandemic having reversed the outlook for both office and retail, causing heavy losses for large Canadian Real Estate Investment Trusts. We are now starting to see a shift towards online commerce too, and that forecasts badly for the Commercial real estate industry too.

What we are seeing with this is that many REITs are now looking to engage is some measure of global diversification of assets, and that does make a lot of sense given the nature of world of commerce nowadays and the interconnectedness of countries and economies. But it’s a slow go to realize the benefits of that and we can likely assume that REIT investments are going to be in tough for a good long while.

Now of course if you’re a realtor who has investors on the commercial side too then you may want to foresee some resultant dips in that side of your business, and plan accordingly. Whether or not that means you focus more on the residential real estate side of the equation is up to you, but that’s probably a pretty smart bet for the foreseeable future.

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