Avoid Canada’s Real Estate Bubble: Bet on Foreign Property

Real estate in Canada is overblown. Consider foreign alternatives like Tricon Residential (TSX:TCN).

| More on:
Photo of a floating bubble

Image source: Getty Images.

Canada’s real estate sector is a mess. Homes across our biggest cities are severely overvalued. By some measures, these homes are more expensive than in world-class cities like London and Los Angeles. High levels of debt across all segments of the economy make us even more vulnerable. 

Simply put, investing in domestic real estate may not be the best idea for long-term investors who are seeking a reasonable valuation. Instead, you could diversify your portfolio by betting on properties overseas. You don’t need a special offshore vehicle or sophisticated tools for this. Here are the top two Toronto-listed real estate investment trusts (REITs) with foreign portfolios.  

U.S. single-family homes

Higher median incomes, lower debt levels, and better valuations — there’s a lot to like about American housing. Single-family homes are particularly attractive. These homes are in short supply since inventory has been declining for years. Now, millennials need to move to these homes, as they start families and look for more space.   

Corporate landlords like Tricon Residential (TSX:TCN) have stepped in to acquire the stock and rent it to the growing renter generation. Tricon is now one of the largest residential landlords in North America with over 37,000 single-family homes across the U.S. (and some in Toronto). The stock has tripled in two years, and it still trades at just 6.7 times earnings per unit. 

The fact that the majority of Tricon’s portfolio is exposed to the U.S. rather than Canada makes it an ideal play for long-term investors. Keep an eye on this opportunity. 

European offices

Just like U.S. residential real estate, offices in Europe are overlooked. Extensive lockdowns over the past two years have compressed valuations across the office rental sector. However, now that the pandemic is nearing an end, and offices are reopening, rents could rebound. 

Inovalis REIT (TSX:INO.UN) is a top pick in this sector. The company owns and manages an extensive portfolio of offices in Germany and France. This year, the team added a number of units in Madrid, Spain, expanding the portfolio. 

Rental yields are higher, and valuations lower across Europe’s business centres. That makes them a better bet than residential real estate in Canada. However, this strategy is overlooked, which is why Inovalis stock has struggled to break out. It’s been rangebound for years, even as rental income has steadily expanded. 

Rising rents and a stagnant stock price have made this one of the best dividend stocks on the market. At the time of writing, Inovalis offers a dividend yield of 9.2%. That’s far higher than the rate of inflation and the average dividend yield on domestic Canadian REITs. 

Bottom line

Real estate is a robust asset class that promises reliable cash flows and steady capital appreciation. However, valuations play a key role in determining outcomes and the value of Canadian real estate is arguably overblown. That’s why I prefer looking overseas for better deals. European offices and American single-family homes should be on your radar for the near term. 

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 Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool owns and recommends Tricon Capital. The Motley Fool recommends Inovalis REIT.

More on Dividend Stocks

Retirement plan
Dividend Stocks

3 Best Ways to Invest for Retirement 

Are you worried about retiring in a weak economy? Here are three ways to invest for retirement while hedging against…

Read more »

Couple relaxing on a beach in front of a sunset
Dividend Stocks

TFSA Couples: How to Make $800/Month in Tax-Free Income

With a cumulative contribution room of $176,000 TFSA couples can easily generate more than $800 in monthly dividend income.

Read more »

grow dividends
Dividend Stocks

3 Tips to Make More Money Investing

You can make more money by avoiding losers. Populate your diversified stock portfolio with quality dividend stocks!

Read more »

green energy
Dividend Stocks

Is Fortis Stock a Buy in March 2023?

Looking for a great stock to buy in March 2023? Prospective investors should take a closer look at what Fortis…

Read more »

growing plant shoots on stacked coins
Dividend Stocks

Buy Alert: 2 Top-Dog Dividend Stocks Are Trading Near 52-Week Lows

Telus and Nutrien are terrific dividend stocks that you shouldn't fear if they sink further.

Read more »

protect, safe, trust
Dividend Stocks

2 of the Safest Dividend Stocks on the TSX

These dividend-paying stocks tend to be less volatile than the overall market.

Read more »

grow money, wealth build
Dividend Stocks

Stop Hoarding Cash! Buy 281 Shares of This Stock Instead to Get $955.40 in Annual Passive Income

Timing isn't everything, but when the market is down this much, it can certainly help you achieve your investment goals…

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Dividend Stocks

Buy 442 Shares of This Stock for a Shot at $12,000 in Annual Passive Income

You should never put everything in one stock. But by drip-feeding into this dividend stock, you can create major passive…

Read more »