‘Demographic is destiny’ is a phrase used to connote that the size and structure of a population will influence its future. The demographic landscape of Canada has been rapidly changing in recent years, with the nation’s population increasing by more than more than 1.2 million in 2023. In fact, based on the Bank of Canada’s latest estimates, provided in a recent monetary policy report, population growth is expected to be approximately 800,000 in both 2024 and 2025. The rapid growth in population suggests the need for housing and why multi-family residential properties are a compelling investment opportunity at this juncture. This article will briefly look at the current state of housing in Canada and highlight investment solutions that provide exposure to this real estate sector.

A look at the rental market

The impetus behind Canada’s population growth has been immigration, which has pushed rental demand higher in recent years. A recent report published by Canada Mortgage and Housing Corporation (CMHC) highlights the widening imbalance between the supply and demand for housing, with the national rental vacancy rate falling to a new low of 1.5% , as of December 2023. With more individuals and families coming to Canada, many choosing to settle in either Toronto, Montreal, or Vancouver, rental demand has starkly increased in these cities. As a result, interprovincial migration has increased, with many individuals moving to Calgary and Edmonton due to their relatively better affordability.

Another seminal factor impacting rental demand is the low affordability of homeownership. Higher mortgage rates and high home prices in recent years decreased the capacity of renters to transition to homeownership. As noted in the CMHC report, in 2023, most major cities saw the turnover rate of rental units decline, meaning individuals and families were less likely to leave their current rental units for a newly turned over apartment or buying a home, due to the elevated cost associated with such an action.

Building residential capacity

To alleviate the stress in the rental market, the Government of Canada recently announced the unlocking of $20 billion in new financing to build 30,000 more apartments per year. The actions of the government are tailored towards ensuring builders have the low-cost financing required to build more rental projects. Eligible rental projects must have at least five rental units and can include apartment buildings, student housing, and senior residences. With the Government of Canada signaling to builders that they can rely on this additional financing; more projects will be able to move forward and increase the supply of rental apartments for Canadians.

Investing in residential real estate

The growth of the Canadian populace and the actions of the Canadian government means the active development of multi-family residential until supply can meet the growing demand for housing. Given this backdrop, residential-focused REITs are poised to be attractive due to expected increases in rental rates, earnings, and dividends for years to come.

For ETF investors seeking solutions that have material exposure to residential real estate, the following solutions are worth consideration:

Vanguard FTSE Canadian Capped REIT Index ETF (Ticker: VRE)

This Vanguard ETF tracks the performance of a broad Canadian real estate equity index that measures the investment return of publicly traded securities in the Canadian real estate sector.  Currently, this Vanguard ETF seeks to track the FTSE Canada All Cap Real Estate Capped 25% Index.

As of December 31st, 2023, the fund’s residential REIT exposure is 17.64%.

Purpose Real Estate Income Fund (Ticker: PHR)

This Purpose ETF is an actively managed solution that invests in real estate-focused equities within North America. In evaluating investments for inclusion within the fund, the manager utilizes a fundamental investment approach, which is augmented by drawing on macroeconomic factors and trends in addition to company-specific growth, equity and value factors.

As of February 7th, 2024, the fund’s multi-family residential exposure is 27.84% and single-family residential REIT exposure is 9.35%

iShares S&P/TSX Capped REIT Index ETF (Ticker: XRE)

This iShares ETF seeks to replicate the performance of the S&P/TSX Capped REIT Index, providing broad exposure to the S&P/TSX Capped REIT Index.

As of February 7th, 2024, the fund’s multi-family residential REIT exposure is 30.80%

Middlefield Real Estate Dividend ETF (Ticker: MREL)

This Middlefield ETF is an actively managed solution that provides diversified exposure to commercial real estate companies operating in the industrial, data center, retail, healthcare, cell tower, office and residential sectors.

As of December 31st, 2023, the fund’s multi-family residential REIT exposure was 24.00% and single-family residential REIT exposure was 4.90%.

Recently, the fund achieved a Fundata Fund Grade A+ rating for 2023. For more information on the fund and Middlefield’s outlook on the real estate sector in 2024, click here.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.