This is a column by real estate contributor Rachelle.
I attended the Canadian Apartment Investment Conference a while back. Due to my position in the room and the nature of the event, it was difficult for me to tell who was saying what at all times; therefore, I emailed my article to the speakers prior to publication for checking. I took the opportunity to ask 6 questions on behalf of all investors. I was absolutely delighted to get a response back almost immediately from Greg Romundt of Centurion Apartment REIT (link). Who better to ask than the President and CEO of a REIT? Nobody, that’s what I say! (what is a reit?)
In addition, Mr. Romundt has generously offered to answer any additional questions that you may have. If you have a question about REIT’s just post it in the comments and he’ll check in and answer every once in a while, as his time allows.
1) I understand that not every investor can invest in a private REIT; what are the criteria for doing so?
As a private REIT, we are still bound by the securities regulations that vary by province in Canada as to investor eligibility.
In Ontario, investors must be “accredited investors” which generally means that they have a minimum of any of the following,
- a) $1 million of financial assets
- b) $5 million net worth
- c) Earn $200k per annum singly
- d) $300k per annum with spouse.
If they don’t meet this qualification they must invest a minimum of $150,000 to qualify. Ontario is the strictest of the provinces.
Outside of Ontario, qualification criteria are easier, if the REIT is structured properly. Broadly speaking this means a minimum of any of the following.
- a) $75k of annual income singly
- b) $125k with spouse
- c) Net worth of $400k.
There are other various exemptions by province that allow smaller investors to participate and we work with investors and their advisors to do so, within the parameters of the securities rules of their province of residence.
For a qualifying investor, Centurion REIT’s minimum investment is $5,000 for an initial investment.
2) What is the major operational difference between publicly traded and private REIT’s; media coverage was one difference mentioned, are there others?
There are not many differences operationally. And by operationally, I assume you are not referring to the pricing of our units but the gears working underneath the hood. I think you mean analyst coverage not media coverage in your question. We have had plenty of media coverage. Refer to the resources section of our website and you’ll find we’ve had a good amount of media coverage. It is financial analysts that work for the brokerage houses that don’t cover us. This is because they will only cover the large public companies that their firms do public security issuances for…thus justifying the cost of the analysts.
The major difference between publicly traded REITs and private REITs has to do with compliance requirements. We are still subject to securities regulation, audit, governance costs (like a board), but our compliance costs are lower. Public companies have a very high reporting requirement, often compiled by expensive lawyers, to comply with the rigid process of reporting. As a private REIT, we must still report, but this reporting is not nearly as onerous and can largely be done by our internal staff at substantially reduced costs. Financial analysts that have been hired to perform due diligence on Centurion Apartment REIT, do report that our reporting detail exceeds that of most public mutual funds/REITs in terms of the information we make available. However, we do this as a matter of policy not legal requirement. Private REITs have far more in common with publicly traded REITs than they have differences.
The primary reason people choose to invest this way is to gain direct real estate exposure without the exposure to stock market volatility.
3) Should the Real Estate Market crash (as some are predicting) what would the effect be on Publicly Traded REITs? Private REITs?
This is an excellent question. We must first distinguish between what you mean by real estate market crash. Most often, in the mind of the investing public when they think of real estate market crash, they assume house prices. Further, they assume that a house price crash is correlated with commercial real estate. This isn’t necessarily the case. I fully believe that the housing market in Canada is in the process of decline. I don’t believe we’ll have a crash but a further 10% would not be unrealistic over the next year in nominal terms. Further, in terms of housing, I believe that they will further deflate in “REAL” terms (inflation adjusted) over the next decade. Canadian house prices are too high, and they always adjust in real terms, part nominal and part from just being stagnant for years. My forecast is for a 10% nominal price decline in houses followed by multiple years of below inflation price appreciation or minimal change in value.
We must draw clear lines between saying there is a housing bubble and a greater real estate bubble as the real estate market also includes commercial classes of real estate like apartment buildings and retail, office, industrial. Apartments tend to be slightly negatively correlated to housing markets and without a large increase in interest rates (which we will not see), commercial classes could continue to see sustained investment while the housing market declines or stagnates.
Why would this be so? Remember, my apartment building (as an example) is a home for my tenants but, is purchased as a home for my investors money. The investment decision is based upon cash flow returns. Housing markets, which are dominated by homeowners and amateur investors don’t have the same constraints. They aren’t buying on the basis of yield. Homeowners buy on the basis of needing a house. They may consider it an investment…but it is not. Since homeowners aren’t focused on cash flow income or pricing metrics, these markets are far more sentiment driven. There is no real financial anchor for pricing.
Commercial properties are firmly grounded in cash flow generation and meeting financial metrics. Remember, when you buy a house, the bank cares about your personal income ( job). They aren’t looking at equivalent rental income to assess whether they will lend on the property. They lend to the buyer, not to the property.
In commercial, the bank lends based on the income of the property, not the buyer. Of course if the buyer has poor credit, this could disqualify the loan but I think you get my point. It is this link to the cash flow of the property that ties investment property values much closer to a disciplined investment approach than for a homebuyer. So, I don’t believe that a substantial move down in housing values, will impact well structured and conservatively financed REITs, either public or private.
Apartment REITs are the least at risk because we have access to CMHC guaranteed loans. No matter what happens to the banks willingness to lend, even in a market downturn, the banks will lend to apartments because they can either buy our mortgages and keep them as Government of Canada equivalents on their books or syndicate them immediately to the Canada Housing Trust. Other classes of real estate don’t have this opportunity and it provides great stability for the apartment class.
If you have questions for Greg Romundt (CEO of Centurion private REIT) please leave them in the comments. Stay tuned for the next part of the interview which will include apartment syndication and how to evaluate a REIT.
About the Author: Rachelle specializes in renting property on behalf of landlords and is the blogger behind Landlord Rescue. She also works with investors to find good investments in Toronto and surrounding areas. Her passion is bringing multi res properties back from the brink and maximizing profitability. Check out some of her other real estate posts on MDJ.