Real Estate investors consider apartment buildings to be the least risky class of housing related investment for a variety of reasons. First off, there are many individual tenants which diversify the risk for the investor.
Apartments are categorized as a “basic needs” industry which creates a unique opportunity for those looking to purchase an apartment building. As a basic needs industry, the Government of Canada, through CMHC, will guarantee mortgages to apartment buildings (for an insurance premium) to ensure that the people of Canada have access to safe and affordable living accommodations. Few other industries in the country have this guarantee available and it is a core pillar of support and stability for those considering the purchase of an apartment complex. As an apartment REIT investor, you directly benefit from these government guaranteed mortgages. This results in significant discounts on interest rates that are payable by investors.
Apartment buildings tend not to be heavily correlated with the underlying economy. When the economy is soft, the basic need for housing does not diminish. In many cases rental housing demand increases as people are less confident to buy a home and will instead opt to rent. As such the risks are often much lower for investors with a well diversified apartment building portfolio than many other classes of commercial or residential real estate.
Because of the above, apartment buildings tend to be among the safest real estate assets, with the best access to long term, reasonable cost debt that keeps this class of real estate as a “desired” investment. This keeps investors interested in buying and holding them for the long term, with the result that apartment prices tend to be much less volatile than the prices of other class of real estate like offices, retail, industrial and hotel properties and are sought after in good and bad markets.
Construction of new apartment buildings is down because of rent controls introduced by the NDP in the early 1990’s. One of the main reasons is that developers can make more money by building condominiums to sell to homeowners. The existing apartment buildings stock is tired and aging but the population of Canada continues to rise and people need quality, well managed places to live but the supply is limited. With limited supply comes greater demand and stability.
Apartment buildings can be bought at a significant discount to their replacement cost. Very often, apartment buildings can be purchased at 50% to 60% of their replacement cost and renovated at significantly less cost than buying new.
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