A lack of supply and recovering immigration levels are likely to “intensify” housing and rental price growth, according to iA Capital Markets analyst Johann Rodrigues upon resuming coverage of the Canadian Multi-Family Real Estate sector.
“The principal phenomenon driving soaring home prices and rising rent growth is the Great White North’s dire lack of supply,” he said in a research report released Monday. “There are only 424 housing units for every 1,000 people, the lowest among G7 countries, with 1.9 million homes needed just to meet the average. Except for Montreal, the number is lower across all large population centres (more than 1 million), with Toronto (386) the most pronounced. Canada’s population is simply growing faster than it can build. Despite COVID, Canada’s population still grew 5.2 per cent (1.8 million to 38 million) over the last five years, almost double the pace of the other G7 countries. Roughly 75% of growth comes via immigration. Immigration numbers, including the all-important foreign student, have bounced back and are headed for new all-time highs, with 432K new permanent residents set to be admitted this year as the government works through the 1.8 million immigration backlog. We believe that the rising population weighed against a growing housing deficit is driving a golden decade (on either side of the pandemic) for multi-family stocks that we’re not yet halfway through.”
The analyst emphasized “it is a myth that investors cannot make money in real estate stocks when rates are rising,” adding: “The trick is to migrate into shorter duration real estate. In the last 20 years, there have been six distinct periods of sustained rising rates (200+ days) and while the TSX Capped REIT Index lagged the broader market (12 per cent vs. 30 per cent on average), short duration real estate (less-than 4-year WALTs) almost tripled the performance of long duration peers (more than 8-year WALTs) and Multi-Family (31 per cent) was the top performing asset class, and the only one to outperform the TSX.”
Mr. Rodrigues also thinks “political theatre” has weighed on equities exposed to the sector recently, however he sees investing opportunities emerging.
“With the upcoming Ontario election and Trudeau’s promise to tackle the ‘financialization of the housing market’ front and centre after the Liberal and NDP agreement, Ontario apartment names have sunk 5 per cent to begin the year (vs. flat Capped REIT Index) ... but the long and short of it is that we believe ‘selling the rumour’ has gone too far and the names will likely bounce as we make our way towards June,” he said.
He resumed the firm’s coverage of seven equities with “buy” recommendations on Monday:
* Boardwalk Real Estate Investment Trust (
) with a $65 target. The average on the Street is $62.68.
“2021 was a helluva ride for the stock, as Boardwalk was the best performing multi-family REIT and the fifth-best performing real estate company overall, posting a 66-per-cent total return (vs. 35 per cent for the TSX Capped REIT Index). We believe that momentum will continue this year, especially as Boardwalk works to surpass its pre-oil crash peak. There’s still good upside in this name,” he said.