The real estate market in Canada can best be described as a roller-coaster ride. With home prices skyrocketing well into the stratosphere, the average price of a home in Toronto and Vancouver is now well over a million dollars. In fact, since the Great Recession, home values in Canada’s biggest cities have more than doubled, while wages have chugged along, registering a paltry 3% growth in the past five years.
While this bodes well for just about every existing homeowner in those metro areas, it doesn’t really help the countless millennials that are looking to buy their first home, who now need nearly a quarter of a million dollars as the recommended down payment.
But like a roller coaster, what goes up, must come down.
This past week, sales data from Canada’s largest metro area confirmed that home prices fell by over 6% last month — a direct response by Ontario’s government to cool the market. One response was to implement a tax on foreign ownership and stricter rental rules for homes built after 1991.
For those would-be buyers looking to pick up an investment property, there is hope in the form of a REIT investment. The idea behind REITs is sound; they often hold dozens, if not hundreds, of properties throughout the country and provide a return to shareholders in the form of a distribution, which is often paid monthly, just like a tenant’s rent cheque.
Dream Office Real Estate Investment Trst (TSX: D.UN) is worth considering. REITs let investors become landlords without needing to get a million-dollar mortgage or having to chase down rent cheques from tenants.
Dream is focused primarily on office properties located in and around Canada’s major metro areas. A huge chunk of Dream’s holdings is in the super expensive (and always in demand) downtown core of Toronto, which translates into a steady stream of income from large companies from a broad segment of the economy that is unlikely to disappear anytime soon.
Dream received a fair amount of coverage last year over difficulties it has with several Albertan holdings. With a slowdown in the economy there, vacancies increased, and the company was ultimately forced to slash the distribution and sell some non-core assets to shore up the balance sheet.
Despite the distribution being cut from its previous levels, Dream still pays a $0.12 monthly distribution, which, at current levels, provides an appetizing 7.86% yield.
But here’s the real kicker.
The eventual sell-off on the stock resulted in a stock price lower than the NAV of the company, meaning would-be investors in the company could pick up shares on the cheap and still get that healthy dividend.
While Dream’s stock price has recovered a bit since then, the current stock price still reflects a slight discount over the former price point.
Another factor to consider is that since the events of last year, Dream has engaged in a strategic review of assets and has begun to sell non-core assets. This has brought in $1.5 billion, which was used to pay down some debt and, among other things, buy back over $80 million worth of stock. As those shares are bought back, they are erased which increases the share of the company that each remaining shareholder owns.
In my opinion, Dream remains a great investment opportunity for investors looking for growth and income-earning potential.
