I got some blowback last week when I suggested that while quite clearly the housing market is in the throes of a strong correction, life and real estate continues on.
Brookfield Asset Management, which is perhaps the best asset manager in Canada, has an interesting strategy when it comes to its real estate portfolio.
The majority of its assets are what you’d expect. They’re high-quality buildings located in the downtown core of major cities — locations that can’t be beat. After all, as the old mantra goes, real estate is all about location, location, location.
But the company also owns a significant amount of what it calls distressed real estate. These are assets that the market doesn’t love for whatever reason, but still have solid cash flows. They end up making money two ways — first collecting the rent and then selling the property for a profit later.
I believe individual investors can borrow such an attitude for their own portfolio. The key is to buy good real estate assets when they’re depressed, collect the yield until the underlying stock recovers, and then move onto the next one. Brookfield targets a 15-20% annual return with this strategy — something I think is very possible if you’re a savvy investor.
Let’s take a closer look at three dirt-cheap real estate stocks that would fit this strategy nicely.
Invesque (TSX:IVQ) owns income-producing medical real estate in the United States, with a few properties in Canada. The 124-property portfolio includes medical office buildings, skilled nursing facilities, and seniors housing facilities. In total, the company owns close to US$2 billion worth of property.
The company doesn’t operate any of its facilities; they’re all leased out to operating companies that take all that risk. These leases also have rent escalators built in, which ensures steady top-line growth. Management have also shown us they’re skillful acquirers, putting a significant amount of capital to work since the stock’s IPO just a few years ago.
Invesque shares are quite cheap, trading at just over seven times 2020’s projected funds from operations. The stock also trades right around book value, while most of its peers trade for a premium to book. And, perhaps most importantly, the company’s 11.1% dividend appears to be well covered, with a payout ratio in the 75-80% range.
Slate Office REIT (TSX:SOT.UN) did the unthinkable in 2019 and slashed its dividend. Because of this, many investors are avoiding the stock, afraid the payout will be slashed again. But once we dig a little deeper, an interesting opportunity emerges.
The company’s portfolio consists of 37 different office buildings, spanning 7.1 million square feet of gross leasable area. The portfolio is spread out across Canada, and it owns a couple of properties in Chicago. Slate takes a value investing approach to real estate, pledging to buy unwanted assets for less than their replacement costs.
No matter how you slice it, Slate Office shares are really cheap. The firm will earn approximately $0.76 per share in funds from operations in 2019, while the stock trades below $6 per share. That puts the stock at just 7.8 times funds from operations. It also trades at 35% below its net asset value.
Finally, Slate Office REIT’s new 6.8% dividend is quite sustainable, checking in with a payout ratio of about half funds from operations.
Morguard (TSX:MRC) is another dirt-cheap real estate stock that trades at a low price-to-book value ratio. It trades for just over $200 per share, despite having a net asset value of more than $310 per share.
One of the reasons for this is because Morguard doesn’t pay out a dividend. CEO and Chairman K Rai Sahi prefers to reinvest the cash flow, creating a pretty compelling opportunity for investors who don’t like to pay any taxes. You can buy today and patiently hold for a long time. The strategy is obviously working pretty well for him; his position in Morguard alone is worth well over $1 billion.
Morguard is also cheap on a price-to-funds from operations perspective, trading at under 10 times 2019’s funds from operations.
Unlike some of the other stocks listed, which have destroyed shareholder value over the medium term, Morguard has consistently grown the business. So, investors have two options — they can flip shares when they get a nice gain, or they can buy and hold this one for a long time.
Fool contributor Nelson Smith owns shares of Slate Office REIT. The Motley Fool recommends BROOKFIELD ASSET MANAGEMENT INC. CL.A LV.
I got some blowback last week when I suggested that while quite clearly the housing market is in the throes of a strong correction, life and real estate continues on.
No, I was not shilling for my industry and, by extension, one might assume, my livelihood.
Yes, I still absolutely believe that things are rough and about to get rougher.
But notable to me is the fact that even amidst all of the scary headlines and all of the well-founded doom and gloom, there are still real estate deals happening in this city. And while as far as I can tell, the who and the how and the why has shifted from the who and the how and the why that drove that wild market that already feels like a distant memory, I’m not sure what we’re seeing should be written-off as anecdotal outliers.
Transaction volume is down by half compared to this time last year. Interest rates currently stand at levels inconceivable less than a year ago. New homeowners are stressed, would-be home buyers are spooked, and everyone else is trying to figure out how worried they need to be.
Yes, yes and yes.
But here’s what I am observing in real time: buyers are absolutely still out there.
Our transaction volume may be down by half, but the remaining half of what was truly record-levels is not inconsequential. It maybe just feels that way.
Case in point: I listed an adorable house in a central Toronto neighbourhood last week. The perfect starter home for first-time buyers. It would have been an absolute bun fight last winter.
I wasn’t sure how it would go. And because of that, I left nothing to chance. We shined her up, I spent a small fortune on staging, the photos were perfect. We did all the things.
I also spent a lot of time managing expectations. All we need is one buyer, I explained to my clients — just one.
Never would I have guessed that we would end up with twenty-five groups braving the miserable cold to come to the open house. And these weren’t people just out killing time on a Sunday. These were buyers, with parents in tow, and home inspection reports in hand, armed with their questions and their critical eye. The same buyers that are supposedly priced out or debilitated by the fear of catching falling knives.
Offer night yielded four offers. But unlike the offer nights of days prior, these prospective buyers weren’t armed with letters to the sellers and waving their bank drafts around. They were cool. They had conditions. And their numbers were conservative. Even in competition.
The house sold for less than I expected, but with the four offers the market was clearly speaking and my clients were willing to listen.
And this experience tracks with what I am hearing from my colleagues: the buyers still out there will participate at the right price. They will come forward when they’re good and ready. There is no FOMO. They will offer on things, sure, but will walk if it’s not right for them.
And this will be how the prices continue to grind downwards.
So while yes, the market has slowed right down, I wonder if the stasis is also due to the logjam of sellers determined to wait out these unfavourable conditions.
I suspect that once reluctant acceptance of new-new normal settles in, we will see inventory rise and sales volume increase. But I feel pretty confident in saying that it will be quite a long time before sellers leave the table feeling like heroes again.
If you’ve been paying attention to the housing market, you’ve likely noticed the relatively bumpy ride it’s had over the last couple of years. After rock-bottom mortgage rates contributed to seemingly endless bidding wars throughout 2020 and 2021, the lightning-hot market has cooled in recent months.
The latest homebuilder sentiment report reflects a slower housing market. Let’s take a closer look at the highlights of changing homebuilder sentiment and falling housing prices.
The National Association of Home Builders (NAHB) takes the temperature of home builders’ sentiment on a monthly basis. In the latest report, home builder sentiment dropped again. The confidence was reflected at 38 in October, which means it’s at half the level it was 6 months ago.
That represents 10 consecutive months of dropping home builder sentiment. With the exception of the uncertain times of spring 2020, this confidence reading is the lowest it has been since August 2012.
“This will be the first year since 2011 to see a decline for single-family starts,” said Robert Deitz, NAHB Chief Economist in a press release. “Given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues.”
As of November, Redfin reported the national median home sale price at $397,549. That’s a 4.9% year-over-year increase. While that might seem like a steep climb, housing price growth has actually slowed down quite a bit.
Home builders aren’t the only ones warning of a potential fall in home prices. Some economists are predicting a sharp fall. The Federal Reserve is warning that home prices might fall, but it doesn’t expect anything like the unforgettable housing market crash that happened during the Great Recession.
With home builder sentiment dropping like a rock, it’s helpful to understand what factors are at play. There are many factors contributing to a changing housing market. Here’s a closer look at the reasons that stand out.
In recent months, inflation has been a main feature of the economy.
The Consumer Price Index (CPI), a popular measure of inflation, was sitting at a 7.7% year-over-year increase in the October 2022 report. Although this reflects a gradual decline from the peak earlier in the year, we are still living in highly inflationary times.
But you probably don’t need to look at a special report to know that inflation is present in a big way. You’ve likely noticed inflation as it hits your household budget. Individuals and families across the nation are forced to spend more on basics like food and electricity.
With this pressure on household budgets, it’s difficult for many would-be homeowners to pull together the funds necessary for a down payment on a home. Plus, the increased costs in other areas of their budget might make shelling out for an expensive monthly mortgage payment impossible.
In response to sky-high inflation, the Federal Reserve has been aggressively tackling the problem. Although the central bank prefers to have some level of inflation in the economy, the current inflation rate is well above the 2% target.
The Federal Reserve increases the federal funds rate when it wants to tame inflation. Throughout 2022, the Fed has instituted a series of rate hikes. As the federal funds rate increases, so do borrowing costs for homeowners.
Mortgage interest rates hit a 2022 peak of 7.08% for a 30-year fixed-rate mortgage. Since then, mortgage rates have fallen a bit. As of November 18, mortgage interest rates are down to 6.61%. But regardless of this small tumble, mortgage rates are still significantly higher than this time last year when the average interest rate on a 30-year fixed-rate mortgage was 3.10%.
Higher mortgage interest rates lead to higher monthly payments for borrowers. The National Association of Realtors reported that the average monthly payment for a homebuyer in the third quarter of 2022 was $1,840. That’s significantly more than the $1,226 average in the third quarter of 2021.
Higher mortgage costs often mean that buyers can’t afford as high of a sales price. With this factor in play, the possibility of falling housing prices seems to make sense as would-be homebuyers are getting priced out of the market.
The housing market isn’t the only sector of the economy impacted by a combination of hot inflation and rising interest rates. As the real estate market shifts around us, you might be interested in adding this exposure to this asset class to your portfolio. But you might not be interested in monitoring the minutiae of the up-and-down housing market trend.
One way to add exposure to real estate trends is by harnessing the power of artificial intelligence through a Q.ai Investment Kit. For example, the Global Trends kit takes real estate into account when making trades that align with your portfolio goals. Consider using this new style of investment technology today.
A recently-released report from Urban Land Institute and PwC suggests a contradiction in terms. As the North American real estate industry returns to a kind of pre-pandemic normalcy, some pandemic-era sea changes are solidifying and likely to endure.
Those are among findings of ULI and PwC’s annual report spotlighting the latest emerging real estate industry trends, titled Emerging Trends in Real Estate 2023. The report draws on input from more than 2,000 industry experts, as well as a number of proprietary data points. Among the highlights: Insights into evolving investor climate change concerns, and property sector trends resulting from the Covid crisis.
The report’s authors acknowledge the current reduction in sales, particularly in the area of housing, comes on the heels of the U.S. commercial property market basking in years of near-record returns, rent growth and price appreciation. Soaring demand for well-situated logistics facilities is helping keep industrial sector vacancy rates at or near record lows. Other real estate sectors, among them hotels and property investments, are returning to the levels seen prior to the Covid-19 pandemic.
The median price of U.S. existing homes leaped more than 30 percent in the wake of the pandemic, rendering an already dismal housing affordability picture even worse. The result: Levels of housing unaffordability unseen in nearly a third of a century.
Factors to blame for the affordable housing shortfall – including restrictive building codes and zones, increasingly complex affordable housing development transactions and building industry labor woes – have remained unchanged or grown worse. With demand for rental units outpacing supply, rents have nowhere to go but up.
The widespread migration to more affordable Sun Belt markets has helped countless Americans weather the housing cost crisis. But with increased demand for Sun Belt housing has come the logical byproduct, increased home prices and rent in the south.
The study authors are not predicting a wholesale exodus from office buildings. The current office environment is a potpourri of downsizing, terminated leases and transition to sublets. But many office building tenants have retained their offices because they signed long-term leases pre-pandemic or just may need them in the future. Distinctive offices are able to attract talent to employers. For that reason, companies must rethink their spaces in order to decide if they serve their needs and can help lure top talent.
ESG, climate considerations
The desire of residents and developers to invest in certain regions is being impacted by ever-more-difficult-to-ignore climate change. Enhanced environmental, social and governance (ESG) disclosures are being sought by investors and other stakeholders, who are demanding voluntary action to address these concerns.
Meantime, greater disclosure, transparency and consistency are the goals of proposed regulations from the SEC. The result is an ever-louder cry on the part of investors for greenhouse gas emission (GhG) limits and more environmentally-friendly, energy-efficient buildings. These goas are a component of the Inflation Reduction Act of 2022.
Justice for underserved
Events of the past three years have also propelled commercial real estate initiatives intended to benefit underserved communities. Objectives include addressing accessible transportation, broadband Internet access and environmental justice concerns, as well as relinking Black and Hispanic neighborhoods that 1950s-through-‘70s urban renewal programs uprooted. As the initiatives are tackled, byproducts could include increasing access to jobs, growing economic opportunities and rebuilding formerly flourishing communities that post-war Federal highway and urban renewal programs left broken.
Investment in once-overlooked residents and neighborhoods is being included in such legislation as the Bipartisan Infrastructure Law, the Reconnecting Communities Pilot and the Inflation Reduction Act, which collectively could put billions of Federal dollars to work on these programs.
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