One big change to real estate in 2018 is a new era of lending scrutiny via a financial “stress test” applied to all potential new home owners. This new mandate is a way for a lender to establish worst-case scenarios and err on the side of caution to avoid arrangements where borrowers are overly extended with debt.
Experts suggest this will decrease first-time home buyers’ mortgage amounts by roughly 20%. Got your sights on a $750,000 starter home? Switch your gaze towards a $600,000 option.
Don’t panic. Just keep renting.
Build capital by buying shares in REIT companies instead, effectively dabbling in real estate investing without a single piece of real estate, nor being subject to a stress test. Here are some low-stress residential REITs that were hot in 2017.
Without sounding too affectionate, Canadian Apartment Properties REIT (TSX:CAR.UN) has been a darling in the REIT sector. With its monthly dividend to make an annual 3.5% yield (paying you $1.6 per share) and plenty of funds from operations (FFO), and around $3.40 per share, this company has lots of room to pay shareholders income as well as improve the business.
This December, CAPREIT announced the acquisition of 11 more properties in the Netherlands, further consolidating this Canadian REIT as a global player. The company used a mix of its cash and new borrowed money for this €82.6 million deal. Look for CAPREIT to have another great year.
Northview Apartment REIT (TSX:NVU.UN) is a high-yield REIT, paying a 7.4% dividend and focusing business primarily in western and northern Canada. FFO were solid in 2017, totaling $550 million for this $1.4 billion market cap company, which helps to explain why the stock increased over 20% for the year. When earnings sputter, however, as in the August 2016 financial report, the stock tends to tumble. In this case it was a 15% drop in share price when 2016 Q2 estimates missed by a comparable amount.
With monthly dividend payments of $0.136 per share, the payout (based on either the FFO or free cash flows) is currently close to 100%. This leaves Northview with virtually no extra cash. The term high yield is really just a euphemism for higher risk. The same holds here, which is why I prefer CAPREIT. But Northview has a solid track record with a real estate portfolio that has a business moat by virtue of geography.
I’ll be watching Allied Properties Real Estate Investment (TSX:AP.UN) closely in 2018 now that the company has done some portfolio shuffling. This is a familiar REIT trend this year. Allied Properties has just sold off five Winnipeg properties valued at $30 million.
Killam Apartment REIT (TSX:KMP.UN) has doubled its market cap in roughly five years, during which time revenue has increased by ~45%. The dividend yield has varied between 4.2% and 5.2%, and there is little doubt the dividend is sustainable, despite creeping up as of late. Meanwhile, effective December 18, Killam was added to three ETF funds: a REIT fund, a dividend index fund, and a low volatility index fund. Fund managers don’t buy junk to make an ETF. They buy gems. This latest development bodes well for Killam.
You don’t have to sit on the sidelines if you rent or lease your house/condo/apartment. Investing in REITs is a hassle-free way to become a landlord.
