The real estate market in Canada is currently a mixture of two oppositely moving constituents, the first of which is the residential sector. The housing market or the residential real estate segment is going down at an alarming rate.
Following in the footsteps of big banks, Desjardins has recently revised its forecast for the Canadian real estate market. The last estimate put the overall price fall between Feb. 2022 peak and Dec. 2023 at 15%.
However, the market is already close to that mark, at least 16 months too early. The revised forecast puts the total fall between 20% and 25%.
The second, relatively smaller constituent, commercial real estate, might be going the other way, at least in some areas. Edmonton is an example where the commercial real estate market saw a jump of about $530 million between the first and second quarters of the year.
This is important to understand, because it may indicate that commercial properties or commercial real estate stocks (including REITs) might be safe investments right now. But if you want to take advantage of the real estate crash, you should consider buying two residential real estate stocks when the market finally bottoms out.
One of the largest REITs
Canadian Apartment Properties REIT (TSX: CAR.UN) is one of the largest REITs in the country, both by asset value and market cap. The REIT currently has about $17 billion worth of assets and a massive portfolio of 67,000 housing units. Most of them are owned directly by the REIT, but there are also the ones it manages on behalf of third parties.
As the name suggests, apartment properties are the core focus of the REIT, though it also has land lease communities on its portfolio.
The REIT stock has almost always been more coveted for its capital-appreciation potential than its dividends, even though it’s an aristocrat, mainly because the yield is usually low compared to other REITs. But if you can buy it at a heavily discounted price, you will also lock in a much more attractive yield than the current 3%, which is already the result of a 22% discount.
A residential rental company
Tricon Residential (TSX: TCN) is similar to CAP REIT in one regard: it focuses on the residential real estate too. Its portfolio is made up of about 37,000 residential properties, and the assets under management are marked at about $16.4 billion, though more than half of them come from third-party owners who rely on Tricon for their property management.
But Tricon is different for a few reasons. Its portfolio also includes a decent number of single-family homes, and most of the portfolio is in the U.S.
It’s too soon to predict how much its small Canadian portfolio of residential properties will bring down the stock, but any discount may be welcome. The stock is undervalued right now, and if it drops further without its income suffering a significant hit, it may become even more attractive.
Foolish takeaway
Understanding the different dynamics of commercial and residential segments is essential for real estate investing in Canada right now. Even if you are not buying the real estate assets directly and investing through the stocks, the understanding may come in handy, as it may reflect in the stocks sooner or later.
