Real estate volatility on the rise – adversity or opportunity?

There has been a lot of news recently about financial troubles at certain Canadian real estate companies and non-bank lenders. It might cause investors to wonder if real estate as an asset class is still an attractive investment. Like so many things, it depends.

At Newport Private Wealth, real estate has been a source of success in client portfolios and it continues to live up to our expectations. But we take a different approach.

Our holdings are predominantly commercial, income-producing real estate. Furthermore, they are well diversified geographically (i.e. Canada, the U.S. with some global investments) and by property type. We own industrial, retail and multi-family sector properties (i.e. apartment buildings, seniors housing), which provide regular income from rents and diversification by tenant. It’s worth noting that when housing markets reverse, the multi-residential sector traditionally performs well.

Typically, when real estate companies get into trouble it is because of high debt loads, lack of cash flow, development risk and/or a big bet on an area that turns negative. None of these characteristics apply to the real estate exposure in the portfolios we manage.

The Newport Investment Committee spends a lot of time discussing and monitoring our real estate allocation and we make asset mix changes accordingly. In fact, we recently sold a portfolio of Canadian commercial properties that we determined were fully valued and redeployed the capital elsewhere.

Finally, there is validity in the expression, “moderation in all things.” In our balanced portfolios, real estate would represent no more than 8-10% and mortgages 6-8%.

While certain real estate markets in Canada may indeed be overheated we would not be disappointed to see a pullback. It could provide a buying opportunity and we have significant amounts of cash on the sidelines. At the same time, the existing properties in our portfolios would continue to generate income. This aligns with our core principle of holding some income-producing investments in your portfolio to reduce volatility and achieve steady returns on client capital.

As long-term investors, we expect and prepare to weather market cycles. Value is preserved by managing risks as we do and value is most often created in market downturns. We will be monitoring signs of both very closely.