“The hunt for alpha has pushed the most sophisticated segment of the market into the alternative space— and many of Canada’s largest pension plans, including the Maple 8, are setting the tone by making significant allocations to real estate,” says Aaron Pittman, senior vice-president and head of Canadian institutional investments at Equiton. In this article, he explains why multi-family residential buildings in Canada represent an especially good institutional investing opportunity.

How can an allocation to private real estate benefit institutional portfolios?

Private real estate provides diversification benefits because of its very low correlation to traditional asset classes. Beyond this, it serves as an effective hedge against inflation and is an effective capital preservation tool. In fact, the MSCI/REALPAC Canada Quarterly Property Fund Index – Residential, hasn’t had a single negative calendar-year return in over three decades. Private real estate is also less volatile than public real estate investment trusts (REITs); it generates a predictable income stream, which offers liability matching potential, and delivers potential capital appreciation. Essentially, private real estate behaves like an absolute return asset class, with Sharpe ratios that compare favourably to other, more traditional asset classes.

Why does Equiton focus on multifamily residential buildings in Canada?

Among the G7, Canada has the lowest average housing supply per capita. To simply catch up to the average, we would have to add 1.5 to 2 million dwellings. At the same time, Canada expects to welcome 1.3 million new immigrants over the next three years, with only 600,000 new housing completions (assuming a mean reversion to pre-2020 housing start levels) in the same time period. And while the adage suggests location, location, location, for the newly settled it’s often about jobs, jobs, jobs—and labour market strength and family reunification tend to intersect in the larger urban centres where we tend to own properties. Multi-family residential buildings are also positioned to benefit from workers’ return to downtown office towers and empty nesters’ desire to downsize, while the younger generation is staying put in rental units because they’ve postponed starting families.

Essentially, private real estate behaves like an absolute return asset class, with Sharpe ratios that compare favourably to other, more traditional asset classes.

Why does Equiton choose to manage the properties it owns?

Equiton was founded by, and is run by, real estate professionals who realized an opportunity existed to bring our expertise to the market. Real estate investment is our singular pursuit. We have extensive knowledge of the communities where we purchase assets and often live and work within them.  That’s important because the relationships we’ve built, along with our reputation as a fair buyer, make it possible for us to acquire a number of our properties off-market.

We select assets according to the strictest investment criteria, but we understand there’s a human element: what we call “assets,” our tenants call “home.” Having a resident manager onsite in every property lets us develop relationships with tenants. It also helps us uncover opportunities to increase value—for example, through renovation or repurposing livable space. Managing properties gives us a different perspective, improves tenants’ living experience and enables us to assemble an institutional quality investment portfolio for our investors.

How does Equiton mitigate the impact of rising interest rates?

We generally arrange 10-year fixed mortgages, which are staggered with respect to term to maturity so that, proportionately, only a fraction will come due at any one time. This mitigates the immediate impact of rising interest rates. Also, as an institutional buyer, we have the leverage and scale to negotiate better terms; and, on acquisition, our professional teams can maximize operational efficiency. So even in an inflationary and rising-interest-rate environment, we can lift our operating revenue and net operating income. And this keeps our debt servicing ratios and interest coverage ratios very manageable.