MBA, CIMTM, Fin. Pl.
Investment Specialist, Products Knowledge
Finally, some good news!
The past few weeks have been very emotional for Canadian investors. However, the month of April was positive for them: those who decided to keep their asset allocation intact, stick to their financial plan and follow the sound advice of their advisor since the start of the crisis benefited from the strong rebound that began on March 23.
The situation is not yet the way it was at the start of the year, but as of May 8, the Canadian stock market had a return of -11.3%. As for the U.S. market, it has gained back almost all the ground it had lost. For a Canadian investor, helped by the depreciation of our currency, the S&P 500 index has a year-to-date return of -1.9%, while that of the MSCI World index is -5.3%. Bonds have played their role as shock absorbers with a return of more than 5% since the start of the year. So an investor in one of our three balanced funds has a return ranging from -2.84% to -4.97%.
Real estate in your portfolio
The lion’s share of an investor’s wealth is mainly due to their investment portfolio, but their principal residence and other real estate can also be important. Today we’ll give you a quick overview of this portion of your assets.
Real estate takes many forms: we often hear about residential real estate, but there’s a whole range of real estate investments, including residential, commercial and industrial rental properties, office towers and shopping centers.
Investments vs. real estate
Let’s first ask the existential question that’s on everyone’s lips: is investing in residential real estate more profitable than investing in the stock market?
Based on the situation in Montreal and Québec City, over the long term the answer is: NO.
Our graph shows you house prices for the period July 1990 to March 31, 2020. This comparison clearly shows that the S&P/TSX Index offered a superior return, even after the drop due to the COVID-19 pandemic, and without including the recovery of the past month.
However, house prices are much less subject to fluctuations during more difficult economic periods such as the early 2000s and the financial crisis of 2008. According to our managers, residential real estate prices should remain stable, but the strong growth of recent years will likely diminish, without necessarily becoming negative.
Interest rates are very low, and financial support from the governments, coupled with relief measures offered by financial institutions to homeowners, should help considerably in this regard. In fact, the real estate sector numbers released last week show a marked drop in real estate transactions, but also a slight increase in prices.
As for commercial and industrial real estate, it is experiencing more difficulties. At May 8, 2020, the real estate sector (real estate income trusts or REITs), as represented in the S&P/TSX Index, had a year-to-date return of -25.27%.
Historically, this sector has helped diversify the portfolio thanks to its correlation rate of 0.69 with the Canadian stock market as a whole and its superior distributions, which made it particularly attractive for income-oriented managers.
Confinement has changed the situation.
- Shopping centres have been closed for several weeks now and online shopping is increasingly favoured by consumers. Once the crisis is over, will they return to their old ways, or will they be tempted to continue shopping online?
- Service companies have turned to telework to continue their operations. Will they still need as much office space or will they adopt telework to shed hundreds of square metres of commercial rental space?
- Still on the rental subject, will the large rental complexes be able to continue their operations with lower occupancy rates and recurring delays in the payment of rent?
Positioning ourselves in a time of instability
Crises invariably bring about change. Some changes are permanent, while others may only be temporary.
The global health crisis seems to tell us that certain movements could continue and accelerate trends already begun many years ago: online shopping is a good example. Such a development will certainly have repercussions on real estate, but the extent of the upheaval remains to be seen.
We would also like to mention that all our Canadian equity funds, as well as our three Canadian equity portfolios, have reduced their exposure to the real estate sector since the start of the year, or have less exposure than the S&P/TSX Index. Some of our managers have no exposure at all to this sector at this time.
We hope we have answered some of the questions you asked us on the subject of real estate. However, if you have other concerns, feel free to contact your advisor who remains available and ready to answer you. We’re here for you.
Stéphane Girard, MBA, CIMTM, Fin.Pl.
Product Manager, Professional Practice
The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. For any questions, don’t hesitate to contact your wealth management advisor or your tax specialist, accountant or legal advisor.