Canada’s goal of attracting 1.5 million immigrants over the next three years is acting as a powerful catalyst for the Real Estate Investment Trusts (REITs) that own apartments and multi-family rental accommodation.
Even though the sector was battered by interest rate increases last year, analysts say the panic selling was overdone and the future is bright, given that demand for affordable housing is already far greater than supply. The wave of immigration is intensifying the shortages, they say.
“It’s not an easy solution,” Michael McNabb, a portfolio manager with Purpose Investments Ltd. in Toronto, says of the supply-demand imbalance. “Frankly there’s just not enough housing for all those people which is why we have been increasing our weighting towards Canadian multi-family units.”
Mr. McNabb oversees the Purpose Real Estate Income Fund which has $31 million in assets under management (AUM). In the last 18 months, the fund has increased its residential REIT component to 36 per cent of the total fund, by adding Canadian names and reducing those in the US sunbelt. Industrial REITs, which include warehousing are its second largest component.
The Canada Mortgage and Housing Corp. highlighted the squeeze in its recent annual report. It noted that Canada’s apartment vacancy rate has dropped to 1.9% its lowest level in more than two decades. There is particular stress in the largest markets including Toronto and Vancouver. The agency pointed to the influx of newcomers as one factor. Another is would-be home buyers who have abandoned their search in the face of high interest rates and continue to rent. A third is demand from university students who are returning to in-person learning post-pandemic.
This pressure is boosting the bottom line of housing REITs. Rents are rising and the underlying properties they own are becoming more valuable since replacement costs are high and lead times are long.
Andrew Moffs, senior vice-president and portfolio manager at Toronto-based Vision Capital Corp., a REIT specialist, agrees that housing supply and demand are out of sync. Mr. Moffs co-manages the Vision Alternative Income Fund, an open-ended mutual fund that focuses on publicly traded real estate securities using a long-and short-selling approach.
The fund has $220-million in AUM, with about 60 per cent of its holdings in Canada, 20 per cent in U.S. and the rest in Europe and Mexico. Almost two-thirds of the holdings are in single-and multifamily REITs, with the next largest category being industrial and warehousing.
“Canada’s immigration plan is good for residential apartment REITs, but it’s going to mean different things for different landlords, depending where they’re situated,” he says. “For example, Alberta doesn’t have rent control so you’re able to charge market rents.”
Mr. Moffs says their top residential REIT holding is Boardwalk REIT (TSX:BEI.UN ) which has 60 per cent of its portfolio in Alberta. He says Alberta is benefiting from interprovincial migration because of its lower cost of living as well as attracting immigrants.
Both portfolio managers like Ottawa-based InterRent REIT (TSX:IIP.UN) whose 12,000 rental apartments are concentrated in major centres in Ontario. Mr. Moffs says their strategy is to buy poorly managed, under-rented properties in strategic locations and gradually upgrade the units. They start with common areas and then renovate individual units as they come available. Redoing kitchen and bathrooms allows them to increase rents when units turnover.
Mr. McNabb notes that the companies are becoming creative about how they develop new rental units. As land and building costs rise, Interent, for example, is converting an Ottawa office building into apartments. Other REITs are adapting unused retail space.
Mr. McNabb says housing demand is widespread nationally, but notes that Atlantic Canada has a particularly strong growth profile. In January, Statistics Canada highlighted this trend, reporting that Moncton, N.B. and Halifax are the two fastest growing Canadian urban centres.
To capture east coast growth, the Purpose ETF has increased its holdings in Killam Apartment REIT (TSX:KMP.UN ) which has a $4.8 billion real estate portfolio, the bulk of which comes from Atlantic Canada.
“You’re seeing a massive population movement to particularly Nova Scotia and to a lesser extent New Brunswick, because it’s a more affordable place to live,” Mr. McNabb says.
The TSX REIT Capped Index ended 2022 with a decline of 21 per cent, but has rebounded strongly with the recent rally. The index is up 11 per cent year-to-date. Feb. 6.
The CMHC report “opened some eyes,” Mr. McNabb says.
Even after the recent run, the companies remain attractive and are trading below their five-to-seven year average of price to cash flow, he says.
Both analysts say that as investors fret about recession, the sector has appeal because of its consistent cash flows, dividend streams and tight supply-demand equation.
“At the end of the day, the sector is extremely defensive. Everyone needs a place to live,” Mr. Moffs says.
Adds Mr. McNabb: “We’re extremely bullish. It was an awful year last year, but [we feel] there’s an opportunity in a sector trading at a fairly sizable discount to its net asset value.”
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.
This article appeared in the Globe Advisor section of the Globe & Mail’s Report on Business on Feb. xx, 2023. For reprint information please view this page.
Adam Mayers 
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