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Population ‘moving south in droves’ creates opportunities for U.S. real estate investments

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This is Globe Advisor’s weekly newsletter for professional financial advisors, published every Friday. If someone has forwarded this newsletter to you via e-mail, or you’re reading this on the web, you can register for Globe Advisor, then sign up for this newsletter and others on our newsletter sign-up page.

More investors are turning to alternative investments such as private real estate, equity and debt to help balance their portfolios.

Real estate is particularly appealing to Canadians, both at home and across the border in the U.S. Perhaps not surprisingly, Canadians made up the largest share of foreign buyers of U.S. property, or 11 per cent of purchases, from April 2021 to March 2022, followed by Mexicans, at 8 per cent, and Chinese, at 6 per cent, according to the National Association of Realtors.

For investors, real estate may not sound like a great investment today, given rising interest rates. However, some argue it’s an attractive time to buy into the asset class, particularly the lenders.

“Floating-rate assets paired with attractive characteristics can offer investors a way to mitigate inflation risk,” says Dean Kirkham, president and chief operating officer at real estate financier Trez Capital in Vancouver.

Globe Advisor spoke recently with Mr. Kirkham about how alternative assets, specifically real estate, can fit into Canadian investors’ portfolios.

What are some of the key trends you’re seeing right now in real estate?

The biggest thing we’re seeing on both sides of the Canada-U.S. border is a massive shortfall in housing due to a combination of rising immigration and more restrictive lending since the 2008 global financial crisis.

In the U.S., where we’re focused, there are two markets – the U.S. sunbelt region and the rest of the country. The population is moving south in droves. While inflation and rising interest rates are a concern, the population is still growing and may accelerate due to migration trends.

So, it’s providing a lot of opportunity in these markets that we’re not seeing in the rest of the U.S. We’re focused on investment in the southern U.S. for this reason. We feel confident in the values in this market from a lender’s perspective and the possibility of achieving higher returns on our investments – even better than what we were getting in the past.

Why are higher interest rates an opportunity for investors?

Rising interest rates have cooled the housing market, yet there’s still a lot of demand.

Developers who can get projects off the ground in this high-interest rate environment are well-positioned because of the housing shortfall. Higher rents are also making these projects more viable, creating sufficient returns for developers to launch projects and move forward. That’s where we see the opportunities.

What are you hearing from advisors on your strategy?

When it comes to alternative assets, advisors are looking for expert asset managers who have experience and understand what’s happening in a particular space, such as real estate in our case.

Many like real estate because it’s a relatively stable investment backed by strong macroeconomic trends. Advisors are also interested in achieving stable returns as part of a broader portfolio mix.

This interview has been edited and condensed.

– Brenda Bouw, Globe Advisor reporter

Must-reads from Globe Advisor this week

How to manage the mindset around debt as the cost of borrowing increases

In a persistently low-interest rate environment, the often painful consequences of taking on debt are minimized. Borrowing money during the past 14 years or so has felt almost free, leading borrowers to assume that their rates will stay low and debt payments will remain the same. However, during the past year, interest rates have risen faster than in any other one-year period during the past 30 years. While this sharp increase has affected most asset classes negatively, many people are feeling the pain most acutely when it comes to managing debt. Alexandra Horwood of Richardson Wealth Ltd. gives tips on how to manage debt to reach financial goals.

Why second marriages require a more robust review of estate plans

With one in four adult Canadians getting married for a second time in their lives, according to recent Statistics Canada data, developing an estate plan that works for their new circumstances is becoming more crucial to protect their individual assets, trust and estate, experts say. That’s especially important if both partners have children from their first marriage. While some may want to set up a marriage contract in advance, others may want to take care of their affairs later with an estate lawyer. Deanne Gage looks at why second-marriage couples should set up a mutual estate planning agreement separate from their wills.

How Canada’s immigration goal will drive the growth of residential REITs

Canada’s goal of attracting 1.5 million immigrants during the next three years is acting as a powerful catalyst for the real estate investment trusts that own apartments and multi-family rental accommodations. Although interest rate increases during the past year have battered the sector, analysts say the panic selling was overdone and the future is bright given that demand for affordable housing is already far greater than the supply. The wave of immigration is intensifying the shortages, they add. Adam Mayers gives an outlook for the sector and explores where opportunities exist.

Why this money manager is betting on global food and entertainment giants

While some investors believe a sharp economic downtown is on the horizon, money manager Christine Poole sees some moderating factors that could lessen the pain. “I’m not in the camp of a ‘hard landing’ at this point, unless we have some black swan event,” says the chief executive officer and managing director of Toronto-based GlobeInvest Capital Management Inc., who oversees about $265-million in assets. One stock she’s been adding is Mondelez International Inc. MDLZ-Q, the global snack food company. Brenda Bouw speaks to her about what she’s buying and selling.

Also see:

What makes for a comprehensive estate plan?

Why health care is becoming a growing part of more advisors’ practices

This 85-year-old who’s written several books in retirement relishes being ‘in charge’ of her time

Wall Street titans confront ESG backlash as new financial risk

Over US$1-trillion of risky U.S. loans still shackled to LIBOR as deadline looms

What you and your clients need to know

Mutual fund managers that stand out in prioritizing investor interests

When looking for a mutual fund to hold for the long term, investors commonly consider things such as historical performance (on an absolute basis and in comparison to category peers) as well as fees. Equally important, though, and often overlooked, is having an understanding of the firm that manages the mutual fund, also known as the asset manager. How a firm operates and the way in which decisions are made can affect areas including capacity and risk management, recruitment and retention of key personnel, investment professional compensation, and pricing schemes. Weaknesses and strengths in these areas can affect the longevity of investments. Danielle LeClair of Morningstar Research Inc. looks at top-rated mutual funds from top-rated managers.

Remote work is hurting productivity and innovation, says RBC CEO

The stunted pace of workers returning to the office is taking a notch out of productivity and innovation, Royal Bank of Canada chief executive officer Dave McKay says. The head of Canada’s largest lender made the comments during a conference call to discuss the bank’s first-quarter earnings. While some employers in Canada have mandated that staff work at offices more often, corporate leaders have grappled with employees resisting calls for teams to return to the workplace. “All CEOs in every sector I talk to are struggling with a balance of developing talent, promoting talent, building culture, creating productivity. It’s tough, we don’t have the final model yet,” says Mr. McKay. Stefanie Marotta reports on what the bank is doing.

The government should include a capital gains tax exemption for employee ownership trusts

Seventy-six per cent. That’s the number of Canadian business owners who anticipate retiring in the next decade and must now explore what’s next for their company. With the federal budget just around the corner, the government is in a unique position to help these owners protect their businesses, look after their workers and preserve their legacies with the implementation of employee ownership trusts, in which businesses are essentially sold to staff. As a supporter of the newly formed Canadian Employee Ownership Coalition, and in light of the proven benefits to society of employee ownership, Tony Loffreda urges the government to give serious consideration to include a capital gains tax exemption for business owners in its trust model.

– Globe Advisor Staff

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Here are some facts about British Columbia’s housing market

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Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.

Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.

Average residential home price in B.C.: $938,500

Average price in greater Vancouver (2024 year to date): $1,304,438

Average price in greater Victoria (2024 year to date): $979,103

Average price in the Okanagan (2024 year to date): $748,015

Average two-bedroom purpose-built rental in Vancouver: $2,181

Average two-bedroom purpose-built rental in Victoria: $1,839

Average two-bedroom purpose-built rental in Canada: $1,359

Rental vacancy rate in Vancouver: 0.9 per cent

How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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B.C. voters face atmospheric river with heavy rain, high winds on election day

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VANCOUVER – Voters along the south coast of British Columbia who have not cast their ballots yet will have to contend with heavy rain and high winds from an incoming atmospheric river weather system on election day.

Environment Canada says the weather system will bring prolonged heavy rain to Metro Vancouver, the Sunshine Coast, Fraser Valley, Howe Sound, Whistler and Vancouver Island starting Friday.

The agency says strong winds with gusts up to 80 kilometres an hour will also develop on Saturday — the day thousands are expected to go to the polls across B.C. — in parts of Vancouver Island and Metro Vancouver.

Wednesday was the last day for advance voting, which started on Oct. 10.

More than 180,000 voters cast their votes Wednesday — the most ever on an advance voting day in B.C., beating the record set just days earlier on Oct. 10 of more than 170,000 votes.

Environment Canada says voters in the area of the atmospheric river can expect around 70 millimetres of precipitation generally and up to 100 millimetres along the coastal mountains, while parts of Vancouver Island could see as much as 200 millimetres of rainfall for the weekend.

An atmospheric river system in November 2021 created severe flooding and landslides that at one point severed most rail links between Vancouver’s port and the rest of Canada while inundating communities in the Fraser Valley and B.C. Interior.

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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No shortage when it comes to B.C. housing policies, as Eby, Rustad offer clear choice

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British Columbia voters face no shortage of policies when it comes to tackling the province’s housing woes in the run-up to Saturday’s election, with a clear choice for the next government’s approach.

David Eby’s New Democrats say the housing market on its own will not deliver the homes people need, while B.C. Conservative Leader John Rustad saysgovernment is part of the problem and B.C. needs to “unleash” the potential of the private sector.

But Andy Yan, director of the City Program at Simon Fraser University, said the “punchline” was that neither would have a hand in regulating interest rates, the “giant X-factor” in housing affordability.

“The one policy that controls it all just happens to be a policy that the province, whoever wins, has absolutely no control over,” said Yan, who made a name for himself scrutinizing B.C.’s chronic affordability problems.

Some metrics have shown those problems easing, with Eby pointing to what he said was a seven per cent drop in rent prices in Vancouver.

But Statistics Canada says 2021 census data shows that 25.5 per cent of B.C. households were paying at least 30 per cent of their income on shelter costs, the worst for any province or territory.

Yan said government had “access to a few levers” aimed at boosting housing affordability, and Eby has been pulling several.

Yet a host of other factors are at play, rates in particular, Yan said.

“This is what makes housing so frustrating, right? It takes time. It takes decades through which solutions and policies play out,” Yan said.

Rustad, meanwhile, is running on a “deregulation” platform.

He has pledged to scrap key NDP housing initiatives, including the speculation and vacancy tax, restrictions on short-term rentals,and legislation aimed at boosting small-scale density in single-family neighbourhoods.

Green Leader Sonia Furstenau, meanwhile, says “commodification” of housing by large investors is a major factor driving up costs, and her party would prioritize people most vulnerable in the housing market.

Yan said it was too soon to fully assess the impact of the NDP government’s housing measures, but there was a risk housing challenges could get worse if certain safeguards were removed, such as policies that preserve existing rental homes.

If interest rates were to drop, spurring a surge of redevelopment, Yan said the new homes with higher rents could wipe the older, cheaper units off the map.

“There is this element of change and redevelopment that needs to occur as a city grows, yet the loss of that stock is part of really, the ongoing challenges,” Yan said.

Given the external forces buffeting the housing market, Yan said the question before voters this month was more about “narrative” than numbers.

“Who do you believe will deliver a better tomorrow?”

Yan said the market has limits, and governments play an important role in providing safeguards for those most vulnerable.

The market “won’t by itself deal with their housing needs,” Yan said, especially given what he described as B.C.’s “30-year deficit of non-market housing.”

IS HOUSING THE ‘GOVERNMENT’S JOB’?

Craig Jones, associate director of the Housing Research Collaborative at the University of British Columbia, echoed Yan, saying people are in “housing distress” and in urgent need of help in the form of social or non-market housing.

“The amount of housing that it’s going to take through straight-up supply to arrive at affordability, it’s more than the system can actually produce,” he said.

Among the three leaders, Yan said it was Furstenau who had focused on the role of the “financialization” of housing, or large investors using housing for profit.

“It really squeezes renters,” he said of the trend. “It captures those units that would ordinarily become affordable and moves (them) into an investment product.”

The Greens’ platform includes a pledge to advocate for federal legislation banning the sale of residential units toreal estate investment trusts, known as REITs.

The party has also proposed a two per cent tax on homes valued at $3 million or higher, while committing $1.5 billion to build 26,000 non-market units each year.

Eby’s NDP government has enacted a suite of policies aimed at speeding up the development and availability of middle-income housing and affordable rentals.

They include the Rental Protection Fund, which Jones described as a “cutting-edge” policy. The $500-million fund enables non-profit organizations to purchase and manage existing rental buildings with the goal of preserving their affordability.

Another flagship NDP housing initiative, dubbed BC Builds, uses $2 billion in government financingto offer low-interest loans for the development of rental buildings on low-cost, underutilized land. Under the program, operators must offer at least 20 per cent of their units at 20 per cent below the market value.

Ravi Kahlon, the NDP candidate for Delta North who serves as Eby’s housing minister,said BC Builds was designed to navigate “huge headwinds” in housing development, including high interest rates, global inflation and the cost of land.

Boosting supply is one piece of the larger housing puzzle, Kahlon said in an interview before the start of the election campaign.

“We also need governments to invest and … come up with innovative programs to be able to get more affordability than the market can deliver,” he said.

The NDP is also pledging to help more middle-class, first-time buyers into the housing market with a plan to finance 40 per cent of the price on certain projects, with the money repayable as a loan and carrying an interest rate of 1.5 per cent. The government’s contribution would have to be repaid upon resale, plus 40 per cent of any increase in value.

The Canadian Press reached out several times requesting a housing-focused interview with Rustad or another Conservative representative, but received no followup.

At a press conference officially launching the Conservatives’ campaign, Rustad said Eby “seems to think that (housing) is government’s job.”

A key element of the Conservatives’ housing plans is a provincial tax exemption dubbed the “Rustad Rebate.” It would start in 2026 with residents able to deduct up to $1,500 per month for rent and mortgage costs, increasing to $3,000 in 2029.

Rustad also wants Ottawa to reintroduce a 1970s federal program that offered tax incentives to spur multi-unit residential building construction.

“It’s critical to bring that back and get the rental stock that we need built,” Rustad said of the so-called MURB program during the recent televised leaders’ debate.

Rustad also wants to axe B.C.’s speculation and vacancy tax, which Eby says has added 20,000 units to the long-term rental market, and repeal rules restricting short-term rentals on platforms such as Airbnb and Vrbo to an operator’s principal residence or one secondary suite.

“(First) of all it was foreigners, and then it was speculators, and then it was vacant properties, and then it was Airbnbs, instead of pointing at the real problem, which is government, and government is getting in the way,” Rustad said during the televised leaders’ debate.

Rustad has also promised to speed up approvals for rezoning and development applications, and to step in if a city fails to meet the six-month target.

Eby’s approach to clearing zoning and regulatory hurdles includes legislation passed last fall that requires municipalities with more than 5,000 residents to allow small-scale, multi-unit housing on lots previously zoned for single family homes.

The New Democrats have also recently announced a series of free, standardized building designs and a plan to fast-track prefabricated homes in the province.

A statement from B.C.’s Housing Ministry said more than 90 per cent of 188 local governments had adopted the New Democrats’ small-scale, multi-unit housing legislation as of last month, while 21 had received extensions allowing more time.

Rustad has pledged to repeal that law too, describing Eby’s approach as “authoritarian.”

The Greens are meanwhile pledging to spend $650 million in annual infrastructure funding for communities, increase subsidies for elderly renters, and bring in vacancy control measures to prevent landlords from drastically raising rents for new tenants.

Yan likened the Oct. 19 election to a “referendum about the course that David Eby has set” for housing, with Rustad “offering a completely different direction.”

Regardless of which party and leader emerges victorious, Yan said B.C.’s next government will be working against the clock, as well as cost pressures.

Yan said failing to deliver affordable homes for everyone, particularly people living on B.C. streets and young, working families, came at a cost to the whole province.

“It diminishes us as a society, but then also as an economy.”

This report by The Canadian Press was first published Oct. 17, 2024.

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