Over time, real estate has proven to be a powerful wealth-creator — anchoring families in the middle class, ensuring secure retirements and providing a solid foundation for the success of retail and commercial businesses.
But now, with the benefit of 2023 vision, every investor, company and homeowner can see that real estate values cannot rise forever. Owners of commercial and retail properties learned this during the pandemic, when remote work and online lifestyles emptied out office buildings and kept consumers close to keyboards. Many American downtowns have still not recovered.
The housing market has been more resilient, in part because supply consistently falls short of demand. Beyond that, people simply need a place to live. Rents are high, and all the prime spots under the nearby overpass are taken. Plus, owning a house is still a measure of success for most demographic groups, the heart of the American (and Canadian) Dream.
With the new reality of elevated prices and escalating interest rates, affordable housing has vanished in many markets. A major Canadian online real estate publication recently asked: “Will Toronto ever be affordable again?” The answer was not encouraging.
The author found that the average mortgage payment consumed 83 percent of a family’s gross income in Toronto, and 95 percent in Vancouver. The median home price in Toronto hasn’t dipped below the million dollar mark in months.
Prudent investors know that market forces will, inevitably, pull down prices. The only question for many observers is whether the decline will be gradual or sudden. If North America is in what many believe to be a housing bubble, the change will be dramatic.
Families are in the market for the long haul, but prudent investors know this is a time to hedge their real estate bets, using a variety of strategies and investment vehicles.
Many high-end investors are taking the concept of hedging bets literally, by exploring hedge fund opportunities. In Canada, a choice is the Arch Anson Tactical Real Estate Fund, offered by Anson Funds of Toronto. In the U.S., some investors are comfortable trusting the track record of Real Estate Investment Trusts (REIT), which typically pay significant dividends on a consistent basis. One study confirmed that publicly traded equity REITs outperform the Russell 1000 over a 20-year period, yielding annual annual returns of 11.6%, in contrast to the Russell 1000’s 6.29%.
Another popular choice has been the Dimensional U.S. Real Estate ETF, which according the U.S. News & World Report pursues long-term capital appreciation “using a market capitalization weighted approach” that avoids volatile sectors.
Another popular pick is the Baron Real Estate Income Fund, which U.S. News & World Report indicates “invests at least 80% of its net assets in real estate income-producing securities and other real estate securities of any market capitalization, including common stocks and equity securities, debt and preferred securities, non-U.S. real estate income-producing securities.”
Like Anson Funds’ Arch Anson Tactical Real Estate Fund, these U.S. investment vehicles seek to mine the opportunities that still exist in real estate, while managing risk and fortifying wealth amid heightened market uncertainty. These investors haven’t turned their back on real estate, but rather are positioning themselves for investment success by understanding the probabilities — and profiting from the possibilities.