There are two important rules to remember when investing in real estate.
- Residential real estate trades at around 2.8 times the average local household income in a balanced market. This ratio holds true globally.
- Commercial real estate is attractively priced when it generates a “cap rate” in excess of 10%. Cap rates less than 5% generally indicate a market in which prices have exceeded fundamentals.
How do Canadian real estate fundamentals measure up against these metrics?
- Residential real estate currently trades at over 4 times average household income with many markets exhibiting worse multiples: Vancouver – 9 times, Calgary - 5 times, Toronto – 5 times.
- Commercial real estate traded at less than 5% cap rates in late 2007, early 2008.
Real estate can be a sound, hard asset investment, but at Groundswell we believe that the Canadian market has farther to fall before normal historic price levels are reached. At the point that the market is at or below historic norms the time will have arrived to start examining real estate investment possibilities again.
Groundswell is performing due diligence on a number of funds that are seeking to raise capital to invest in western Canadian real estate at distressed prices – the strategy is to build portfolios of high quality real estate in core markets that will allow investors in the funds to obtain income while having upside exposure to price recoveries as the economy improves. Groundswell expects real estate prices to continue to fall into 2010 but with entry points to begin appearing in selected markets towards the end of 2009.
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