A new way to win

Rent controls, higher interest rates, stress tests, eroding affordability: The challenges facing Canadian investors in 2018 are legion. But a challenge is really just an opportunity to get what you want in a new way.

Fortunately, real estate offers a wealth of options for investors who want to take advantage of the relative stability of the Canadian market without having to evaluate neighbourhood fundamentals or employ a small, costly army of Realtors, mortgage brokers and lawyers.

A private equity partner might be exactly what such investors are looking for. CREW spoke to Clifford Fraser, chief operating officer of leading private equity firm Equiton, about the benefits of private equity investing, the enduring strength of Canada’s apartment market and the direct correlation between the two.

CREW: Our readers might not be familiar with private equity investment. Can you briefly explain what it is?
Clifford Fraser:
Private equity is essentially an investment in companies that aren’t traded on any exchange. Your investment is an equity investment, but rather than buying shares of a public company, you buy shares or units of private companies.

CREW: What are the advantages of private equity investing versus investing directly in rental properties or purchasing blue-chip stocks?
CF:
Investing in a fund like ours – specifically in something like the private apartment REIT we launched in 2016 that focuses on large-scale apartment and student rental properties – provides access to a large portfolio of properties. If you tried to do this on your own, it could take a lot of time, effort and money. Private equity investing provides access to all the great things property ownership can offer without having to do the work.

In the stock market, you get your value from the price of the shares, not necessarily from the assets that underlie those shares. And the shares move up and down every day. One day you’ve made money; the next day you’ve lost money. Since private equity investments don’t trade every day, investors aren’t tied to the emotion of the stock market.

Speaking of stocks, there’s a myth that investing in public markets – a little oil & gas, a little financial services, some tech – makes you fully diversified. But the fact is that most investors are still invested 100% in public investments, so they actually aren’t truly diversified. They’re missing that privatemarket piece, which they now have access to.

CREW: The GTA market experienced some severe fluctuations in 2017. How protected are your investors from sudden price drops?
CF:
When the press discusses the “overheated real estate market,” it’s concentrating mostly on the single-family/condo sector, where there’s still a lot of emotion – and therefore a lot of volatility – tied to the market. Equiton’s focus is on apartments. As much as apartments are a real estate asset, they are valued the same way you would a business: What improvements can be made to enhance returns? That doesn’t necessarily happen with single-family properties. If your neighbour’s home has a larger backyard, that home could theoretically be more valuable than yours. There’s not much you can do about it.

Apartments are a necessity. With the increased demand for housing and the eroding affordability in a number of Canadian markets, there aren’t a lot of affordable places to live. People are making the decision to move to rentals, especially if they’re professionally managed. That’s putting a lot of positive pressure on the apartment space, and it’s paying off for our clients.

CREW: How do rent controls affect the returns your investors see?
CF:
Very little. Rent control really only affects existing tenants. If a tenant leaves and you bring in a new tenant, you can then charge what would be considered market rent for that particular unit. Buildings have a natural turnover, and when that happens, we increase the rent to market level, which tends to result in a far greater increase than rent control would. It allows us to pass on that additional cash flow to investors.

CREW: What differentiates Equiton from its competitors?
CF:
Although we are in the financial services or investment space, we are real estate experts first. Throughout our careers – and there’s more than 100 years of combined experience among our executive leadership – we have been through every conceivable real estate cycle. We know how to manage assets through the good and the bad, and have an ability to find value, both in markets and in buildings, that our competition can’t always find. We know where to look for skeletons and where to look for opportunities.

Investor protection is paramount to us, so we’ve put in place some of the strongest governance and oversight available for investors, which is particularly important when you’re thinking of investing privately.

CREW: Are there any upcoming Equiton offerings investors shouldkeep an eye on?
CF:
In March, we’ll be launching a new real estate product for Canadian investors that will be very unique. It will give investors exposure to multiple real estate assets under one roof – everything from commercial and industrial properties to real estate lending and development. It’s a balanced private real estate portfolio that’ll save investors the time, energy and effort required to find these opportunities individually.

CREW: What else should investors know about private capital markets?
CF:
The private markets were once the exclusive playground of institutions and highnet- worth investors. If you didn’t belong to either of those categories, you couldn’t always participate in the private market. Across Canada, the rules around who can qualify to invest in the private markets changed dramatically in 2016. A lot of investors still don’t know that there are now alternatives available to them. They’re not offered by the big banks or traded on the Toronto Stock Exchange, so people have to look for them. But they’re out there.

 

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