2 Real Estate Stocks to Consider if the Sector Becomes More “Local-Exclusive”

The government of Canada is contemplating taking drastic measures to control the housing market, which includes banning foreign capital influx.

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The elections are just around the corner, and despite their differences, one thing the two largest parties in Canada agree upon is that foreign capital is a “negative” catalyst influencing the housing market.  Both liberals and conservatives are planning to put on a two-year ban on foreigners owning property in Canada.

The current prime minister has also promised to put an end to “blind bidding,” a practice that contributes to the rising property prices.

Making the market more exclusive to local buyers and taking a concrete step toward stopping foreign buyers from pumping the housing market up might be a step in the right direction. There is a relatively small possibility that it can trigger a correction that, if not controlled, might devolve into a full-blown housing crash.

Whether or not it leads to a correction, the impact of banning foreign capital and other measures to control the housing market will inevitably reach the stock market.

A REIT

As one of the largest REITs in the country with a portfolio composed of 65,000 residential apartment and townhouse suites, Canadian Apartment REIT (TSX:CAR.UN) might see a dip in its asset value if housing prices take a nosedive. Currently, the REIT is growing at a decent pace and has already reached its all-time-high valuation.

The 39% growth in the last 12 months is in line with its default growth pace, contributing to the sustenance (and slight rise) of the 10-year compound annual growth rate (CAGR) which is currently 16.2%. The REIT also offers dividends though the 2.3% yield is not very flattering. Still, if you consider the powerful and consistent growth that comes with this relatively low yield, the REIT is a great buy, especially at its current valuation.

The price-to-earnings is just eight, and the price-to-book is 1.1. And if the REIT dips in the near future when the impact of the ban fully materializes, you might be able to buy it at an even better price and with a higher yield.

A mortgage company

A mortgage company like MCAN Mortgage (TSX:MKP) that invests quite heavily in residential mortgages might see the opposite effect. If more local buyers enter the market, MCAN might see the business booming. Even now, the company is riding the recovery wave and is getting close to its all-time highest valuation. The post-pandemic growth of 73% is one of the best growth bouts in the stock’s recent history.

Capital appreciation is not exactly MCAN’s forte, and it’s an attractive valuation thanks to its dividends. The company is currently offering a mouthwatering yield of 7.2%, and the payout ratio is quite stable at 42.3%. More importantly, the company might be on its way to becoming a Dividend Aristocrat as it has been growing its payouts consecutively for the last three years. It also paid a generous special dividend earlier this year.

Foolish takeaway

The combination of the two stocks can add both growth and dividends to your portfolio in decent proportions. The stocks have already proven their mettle, and if you can wait for the real estate to enter a bear market phase, you will get a better valuation deal and will lock in higher yields for both stocks.

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. The Motley Fool has no position in any of the stocks mentioned.

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