The investment landscape looks significantly different now to before the global COVID-19 pandemic. Some might even say that the topography is more difficult to navigate. Throughout this article, Canadian Real Estate Wealth will attempt to answer the question of whether the landscape is vastly different, and if so, how one traverses the new topography to ensure a great return on investment.
Because we know that we don’t know all the things, we have enlisted the assistance of Two Sevens Capital for their expertise. Based in Oakville, Ontario, Two Sevens Capital is a private investment boutique firm focused on wealth creation through private direct investment and is led by Founder and Chief Executive Officer, Adam Batstone.
Investor Outlook as a Result of the Pandemic
While we don’t wish to revisit the challenges faced during COVID-19, we're examining the impact it had on the economy through the lens of investor confidence.
Between 2019 and 2020, overall confidence in Ontario’s economic outlook dropped by a whopping 7% overall. 2021 saw a further drop by another 2%.
We asked Mr. Adam Batstone for his observations at the beginning of the global pandemic in the second quarter of 2020 from an investor’s lens. Here’s what he had to say,
At the beginning of the COVID-19 pandemic, there was a significant shift in investor sentiment. Many were gripped by fear, causing a dramatic drop in the stock market in March 2020. We observed a 34% decline in the S&P 500 during that period, which led to a surge in cash positions as investors sought safety.
Mid-pandemic Business Owners’ Outlook.
According to the Ontario Chamber of Commerce, in their 2022 Economic Report (OER), in 2021 “the business community gained significant confidence in Ontario’s economic outlook amid progress on vaccinations, reopening and initial signs of economic recovery.”
At the national level, real gross domestic product (GDP) rebounded by 4.2 percent in 2021, which led to some positive momentum. This momentum was tempered by global supply chain disruptions, labour shortages, and of course inflation.
Investing in a Time of Inflation.
We have all experienced the pinch of global inflation, nationally, and at the local level.
The April 12th, 2023, announcement by the Bank of Canada marked the pause, and hopeful end of rate increases in the foreseeable future. It does, however, beg the question, ‘Do investors have a more positive economic outlook now, as a result?’.
We turned to Mr. Batstone again of Two Sevens Capital for his boots-on-the-ground assessment of how these Bank of Canada announcements impacted investors’ outlook. Here is Adam’s insights,
Inflation has become a prominent concern for investors in recent times. The Bank of Canada's decision to end interest rate increases as of April 12, 2023, was made with an eye toward maintaining stability. As of March 2023, the inflation rate was hovering around 4.3%, which was notably above the Bank's target range of 2%. This has led investors to re-evaluate their strategies in the face of an uncertain future.
Perhaps the biggest headwind to getting deals done now is uncertainty over where prices will settle.
While the Bank of Canada has announced that it anticipates no further “financial belt-tightening” and consequently rates have normalized and are likely to be coming back down to the end of the 2023 year, lenders have been tightening borrowing requirements. This, when partnered with higher finance costs compared to pre-pandemic rates, make it harder for investors to raise capital and meet the benchmarks and timelines associated with their projects.
At a time when financing availability has lessened and its cost to borrow has increased, there is good news for companies with a solid environmental, social and governance (ESG) track record.
ESGs will have an advantage in attracting and maintaining investment. This is further bolstered by notions in the latest Federal Budget which seem to suggest more government grants, capital, subsidies, and support are available for ‘green organizations”. This will, in turn, entice investment from other institutional players and sourcing new forms of capital that continue their upward trajectory in Canada.
Scaling Up Digitally
Another social trend coming out of the pandemic that is impacting the economic outlook is the emergence of digital technology. While for most of us, some element of digital technology has been present for our lifetime, the COVID-19 pandemic really forced both reliance on and innovation in all things digital.
The challenges of the pandemic have paved the way for powerful solutions.
At the base of the economic pyramid, more than ever small business entrepreneurs and their customers are using digital payment methods, often for the first time.
We’ve seen this move towards digitization impact the legal and investment fields beyond point-of-sale interactions, as well. For example, e-signing has never been more prolific in its use than it is in the post-pandemic era. This presents a tremendous opportunity to leverage these building blocks and introduce a broader array of tools that are vital to deepening resilience and creating new, innovative investment opportunities.
One by-product of digitization is an increased focus on key performance indicators. This benefit comes as a result of the ability to capture information in real-time in a capacity never before seen. This comes as a result of the scaling up of information technology solutions forced by the pandemic. This translates to agility for investors.
What About Real Estate?
Report after report and expert after expert still note that in the post-pandemic era of rising inflation, investment in real estate is still the top performer. Entrepreneur.com commented, “Real estate is almost always an excellent investment and should be at the top of your list [as an investor].”
Historically speaking, commercial real estate has been the most lucrative investment opportunity, however, the COVID-19 pandemic crafted the phrase, “the new normal”.
The work-from-home and hybrid functions have certainly altered the demand for commercial real estate, however, that same decreased demand for commercial real estate with employees not going into the office as much increased the demand in multi-family real estate.
The work-at-home and hybrid models forced many families to re-evaluate whether their existing living quarters were meeting their needs in the new context. This resulted in a major real estate shuffle that we have seen both in local and national markets and also in international markets. This real estate migration was extremely lucrative for investors and demonstrated to those who weren’t able to capitalize on this trend, the importance of watching the market attentively and being agile.
Five macroeconomic tailwinds for the apartment business reached epic proportions because of the epidemic and the economic and social policies that it precipitated:
There was a pre-existing multigenerational tidal wave of demand for multifamily rental properties, driven by both rent-by-choice and rent-by-necessity.
The demand increased rapidly as consumers wanted more outdoor living options, larger living spaces, and remote work options.
A spike in apartment demand occurred because of a limited new supply being built and a price rise in the single-family for-sale market.
COVID aftershocks subsided, and the capacity for fresh supply additions stopped.
A major consideration that is juxtaposed with the above imbalances is a worldwide capital shift toward de-risked assets. This has added fuel to the already powerful impacts of these four catastrophic imbalances.
We turned one last time to our expert in the field of investment, Mr. Adam Batstone of Two Sevens Capital to share with you, our loyal readership, the advice he gives his clients on how to maximize return on investment in these economic times. Here’s what Adam had to share:
Investing in commercial multifamily real estate during inflationary times has distinct advantages. For instance, during periods of high inflation, the value of hard assets like real estate generally increases. Moreover, as the cost-of-living rises, so too do rental rates. By investing in value-add multifamily assets, investors can benefit from both capital appreciation and increased cash flow, providing a solid hedge against inflation.
There are ways for the savvy investor to turn obstacles into opportunities and turn that into a gain in this kaleidoscope of an economy. It requires careful analysis of the economic outlook but also agility to be able to move with the twists and turns that the post-pandemic economy presents and the trustworthiness of the folks that you choose to service your portfolio.
If you wish to review your investment portfolio or would like to transform your access to wealth creation, connect with Two Sevens Capital here or reach out to Adam Batstone at [email protected]