As uncertainty spreads through the world's financial markets, investors are growing increasingly skeptical of stocks and traditional bond vehicles. Equity valuations are extremely stretched, particularly in North America, and emerging markets still present a level of risk that many are not prepared to take. In the midst of all the geopolitical uncertainty, real estate remains a prime opportunity and Canada's market is a particularly strong investment proposition.
"Canada is extremely attractive for different types of international investors: those who want to benefit from the strong market conditions here and others who want to move here to get Canadian resident status," says George Lawton, CPA, CA, CEO, North American Home Finance Inc. "There are lots of good economic indicators that make Canada attractive. Compared to other countries, employment has been good since the credit crisis and even our taxation levels are now equal to or better than the U.S. in many cases."
Lawton also highlights another benefit of real estate investing in such volatile times: its ability to hedge against inflation. Since the credit crisis many experts have been waiting for inflation to spiral out of control, but, even if inflation did take off, real estate investments would remain secure. "Construction and building replacement costs are directly related to inflation, the value of land is connected to income levels, and income is directly impacted by inflation," Lawton says. "Both of those things are driven, and benefit from, inflation from a returns standpoint. Therefore, real estate is a good thing to have if you're worried about inflation or too much money being printed."
Governments are incented to ensure economies have healthy levels of inflation for many reasons. Deflation reduces the tax base, which has direct consequences on pension benefits, healthcare and various other public services. "In times of inflation, asset values are rising and people psychologically feel good when they see their home value grow – it's a good time to have a part of your portfolio in real estate," Lawton says. "Over the past 10 years, all of the major North American pension plans have set up strategies to directly allocate to real estate including the Canada Pension Plan investment fund. That's a strong signal of how well the market is performing."
Investors demand security and return
Combining financial security and lucrative returns is a difficult investment mix to find in any market. Investors want and demand a lot, and rightly so. They want solid returns, principal protection, control over when they can access their money and, most importantly, they want to sleep soundly at night free from anxiety. For the investor with those demands, home build bonds could be the best option.
"HomeBuild Bonds are directly secured against the property and overseen by a trust company, which is very different from a limited partnership or syndicated mortgage," says George Lawton, CPA, CA, CEO, North American Home Finance Inc. "They also enable investors to avoid market timing and provide predictable results: investors get a specific forecast of profit rather than just a speculation."
When an investor buys shares in a limited partnership or syndicated mortgage, they are ultimately putting their faith in the management company to complete the project and provide a return. If something goes wrong, it's the investor who is left out of pocket. "It's different with bonds because the trust company can control the title of that property for those bond holders," Lawton says. "You're not relying on management to see the project through to its end result."
A real estate bond's profit margin and returns are built in based on the current value of the real estate. Even if the market does go down during the investment period, the built-in profit margin covers the return of capital to the bond holder.
HomeBuild Bonds are also short-term in nature. Obtaining all of the zoning and approvals documentation can take time, so the bond does not invest until all of those milestones are met. The investment is made when construction is ready to begin. "Also, the company sponsoring the bonds must have its own funds invested in the project," Lawton says. "All bond holders get paid out their entire principal return plus their minimum return before the company's capital is paid back. Therefore, the company is really motivated to make sure the project goes well."
The most important factor of HomeBuild Bonds is the fact that the investors' capital is protected by a surety company's guarantee during construction. This means all development risk is eliminated and an investor can have peace of mind knowing that the development will be completed or they will get their money back plus their minimum priority return.
Secured Real Estate Bond Investing
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