According to research from the federal housing agency Canada Mortgage and Housing Corporation (CMHC), existing Canadian income-generating apartment properties outperformed the majority of other Canadian real estate investments in the nineties.

CMHC economist Joel Starkes, recently promoted to Treasury Officer in CMHC's Capital Markets, reports that apartment investments have offered investors generally stable, positive returns and a volatility lower than stocks and bonds over the past decade.

Canadian real estate generally took a beating during the recession in the early nineties. Residential real estate values in most cities still remain below prices seen in the late eighties. This residential pattern has cast an undeserved pall over apartment investments, says Starkes. He refers to the new CMHC report, "Understanding Private Rental Housing Investment in Canada," which states that only Halifax, Nova Scotia, of the six major Canadian rental markets, could support development returns of 15 percent or more. This report found investment in existing rental housing to be more viable than new rental housing in most markets.

Supply and demand is an important factor in apartment investment returns. The Canadian demographic trend towards a reduced number of family households has generally made residential real estate less attractive to investors, but trends such as the increase in non-family households and the low affordability of housing for younger Canadians have led to an increased demand for apartments

Typically, with apartment investments, less risky properties give lower returns. However, Starkes says that, based on the Russell Apartment Index, in the last year or so these investments have provided some investors with greater return for less risk. Starkes suggests that apartment investments can provide diversity to traditional asset portfolios.

Apartment properties have better risk profiles than other asset types because these relatively-stable, long-term investments generate returns without large swings in value. The downside is that these returns are restricted by rent controls and local market conditions. Ontario's new Tenant Protection Act may lead to greater returns, particularly in Toronto's traditionally tight rental market.

"For someone looking to diversify and looking at the data only, investing in existing apartment properties makes sense, but the work and the cost of management are not included here," said Starkes in response to a question about the actual potential of this type of investment. "This may not convince anyone to jump into rental housing but they may decide it deserves a second look. They may say, ‘It is something we can watch if this upward trend continues.' There are a lot of things other than the numbers that come into this."

Followup: For CMHC, visit http://www.cmhc-schl.gc.ca/ . To get the report, call the Canadian Housing Information Centre at 1-800-668-2642 or 613-748-2367.

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Published: September 21, 1999

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