We are in the midst of what could be an economic recession worse than what we witnessed 12 years ago. The COVID-19 pandemic is raging across the world and bringing global economies to a grinding halt. Canada’s economy hinges on three things: jobs, oil, and homes.
The pandemic has decimated the jobs market. The price of oil nosedived in recent months. The latest OPEC deal might result in a truce between Saudi Arabia and Russia in the oil price war. Still, it will have long-lasting consequences on Canada’s energy sector.
Commercial real estate, such as retail stores, offices, and industrial real estate, has also taken massive hits due to the economic shutdown. Residential properties had been in some trouble for the past several months before the global health crisis even began. It is likely we will witness a housing market crash.
As an investor, you might be worried about the potential housing market crash. I am going to discuss two ways of how you can possibly capitalize on it and make money off of the downturn.
A cheaper housing market
What happens when the demand for any product collapses? The price of the commodity in question drastically declines. The prices of properties in the most significant areas of major Canadian cities have been considerably high in recent years. As the housing market crashes, the price of residential properties will come down to more reasonable valuations.
Where the barrier to entry for buying houses in Canada became insanely high, things will change. Investors who are in search of real estate assets can purchase houses at a substantial discount. The prices will go back up — it is an inevitable part of the economic cycle. It may take some time, but the value will go back up. It always does.
REIT sell-off frenzy
Another thing that happens during a market crash is a frenzy of sell-offs fueled by panic. It creates an opportunity for stock market investors who want exposure to the potential benefits from the housing market without actually purchasing real estate. You can invest capital in buying shares of real estate investment trusts (REITs) instead of buying property.
It offers you a more accessible way to get exposure to the real estate market without the need to spend substantial upfront capital. In a housing market crash, REITs will also suffer the impact of reduced property values. However, well-funded firms can also capitalize on these market conditions to bolster the real estate portfolios owned by the REIT.
A robust REIT like Canadian Apartment Properties REIT (TSX:CAR.UN), for instance, could be worth consideration. CAPREIT is one of the lowest-risk residential REITs. However, the market crash is not being kind to the stock. At writing, it has plunged by just over 25% from its February 2020 peak. At the current share price, it has a 3% dividend yield.
The firm has been investing in manufactured home communities as well as new suites to diversify its portfolio. The firm now boasts over 11,000 MHC sites in its portfolio from 72 different communities across Canada. Before the crisis hit, CAPREIT saw its share prices increase by more than 85% between 2015 and 2020. It is a substantial rate of growth for a REIT.
The stock is down by a significant margin due to the pandemic-fueled market pullback. Its valuation is highly attractive right now. Despite the discounted share price, the firm can make it through the downturn due to its healthy balance sheet.
There is still a degree of risk involved if you consider the short-term prospects. Nobody can predict how long the market crash might last. CAPREIT is well funded, but there is a chance that the essential rallies might not come soon enough.
A housing market crash is the best time to purchase residential property before the prices go back up to astronomical figures. If you do not have that kind of capital to spare, you can consider investing in a REIT like CAPREIT at a discount. It can offer you exposure to the residential real estate sector without actually buying property.
There may be a bit of uncertainty involved in buying shares of a residential REIT. Still, CAPREIT offers you the least risk as opposed to other assets in the industry.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Adam Othman has no position in any of the stocks mentioned.