Covid 19 is apparently having a far greater effect on our capital markets than it appears to be having in our general populace! Business commentators are tripping over their superlatives describing the impending disaster that looms. To really torque the average investor’s anxiety, some are resurrecting the credit crisis of 2008 as a foreshadow of what’s to come (this is particularly loathsome as the credit crisis of 2008 was rooted in stupidity, not a flu).
The regular chorus is now being sung by financial advisors across the land: steady the course, keep calm, and, consistent with the tired wartime refrain, carry on. Investors meanwhile watch their gains evaporate with every imagined sneeze, cough and sniffle that has now become for every mass transit commuter a harbinger of death. Yes, that queasy smell of stable air fixed in our nostrils is the confirmation that the horsemen of the Apocalypse are resident in our streets.
Whoa, whoa is me the investor – unless I’m in private property!!
Our markets have been quite the roller coaster over the last several weeks, much of it downhill. Of course this has created concern. It is generally this kind of market volatility that has inspired many investors to leave the public capital markets for the perceived stability of the private markets. As we have written here many times before, a well balanced portfolio will have investment products that do not correlate with the general public markets.
“Correlation”, in the finance and investment industries, is a statistic that measures the degree to which two securities move in relation to each other. So, for example, many public securities will rise altogether at once and likewise fall all together at the same time – they “correlate” with one another. There are financial models that portfolio managers employ to determine the degree to which various securities move in step with each other – the “correlation coefficient” is the fraction that determines this.
Many conservative investors and portfolio managers will look to balance their public company portfolios by having pools of securities that do not move closely together – that are not highly correlated. Another simple strategy that many will employ is to simply invest in products that are not traded on the public markets.
The exempt capital markets offer a wide variety of investment products related to real estate that attracts investors looking for stability in unsettled times. Obviously the most common asset to acquire is real estate itself – a rental property, a recreational home, etc.
Another common strategy is purchasing a private mortgage. It is the bread-and-butter of many mortgage brokers to sell or “broker” private mortgages. These mortgages may be residential or commercial meaning the mortgage instrument is secured by property used for residential living or commercial undertaking. For a lender (or “mortgagee”) the criteria by which one lends to a homeowner is quite different from the criteria that one employs lending to a commercial enterprise. An individual can purchase a mortgage or part of a mortgage. When there is more than one lender on a mortgage, we refer to the group of lenders as a “syndicate” and the mortgage as a “syndicated mortgage”.
A third common way of participating in private real estate is through a private real estate investment trust or “REIT”. A REIT is basically a bag of buildings that a group of investors own together, typically through a trust. It is as close to owning real estate as owning the ground beneath your feet. Canadians are quite familiar with REITs. There are numerous REITs that trade on the Toronto Stock exchange such as RioCan, Canadian Apartment Properties, Allied Properties, Chartwell, to name only a few. These REITs all trade on the public market and will have a degree of correlation with the public market overall. Private REITs do not correlate with the public markets. A private REIT aims to deliver to its investor both a coupon and a capital return. The coupon is generally tax efficient and the capital gain is realized at the time the investor sells their interest in the REIT.
As it is often said, nothing is more secure than the ground you’re standing on! Private real estate is a different track. For investors serious about diversification and intent on anchoring their portfolio to weather any storm, private real estate investment is critical. Private real estate investment is a patient investment – investment dollars are tied up for extended periods. This is not an investment for people who may need to liquefy their holdings on short notice. These investments are tied for years. The return for the private real estate investor though is twofold: (i) a significantly higher return and (ii) freedom from public market instability.
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