Today on ThinkSmart Financial Advisors, Rob McClelland and Mike Connon, discuss, once again yes, the real estate market and its performance over the last ten years. This time we take a deeper dive and look not only at residential real estate but at the global real estate market, operational real estate, infrastructure real estate, resorts and lodging, land holdings, diversified investment products, development, and industrial lands. There are so many types and parts of the real estate market that we often don’t consider, but which ones are the best performers? Find out more today on ThinkSmart.
Transcription
Rob (00:00):
Hello, this is Rob and Mike from The McClelland Financial Group of Assante Capital Management, and this is Think Smart with TMFG. Today on Think Smart with TMFG, Mike and I are going to be discussing real estate and its performance over the last 10 years. Mike, surprise, surprise, surprise. We’re going to talk about real estate again. I thought we would do something a little different today. I thought it might be interesting to really look at the global real estate, and more, not necessarily residential real estate. And why we believe that real estate, especially global real estate, is a great investment.
Mike (00:44):
I guess the definition of real estate is a real big one to get into. What actually is real estate? Remember a couple years ago we were going through our portfolios, and we found our biggest real estate holding was American Tower Corporation. And it basically does cell phone towers. I never would’ve considered that real estate. But in reality, it’s getting land, it’s renting it out to cell phone companies to use the airways. So I guess it truly is a real estate company, but you would never think that would be your largest real estate holding.
Rob (01:14):
And it’s extremely profitable, has high security, is a very valued land. It’s often higher points in specific towns and locals. It’s very important.
Mike (01:27):
I had farmers 20 years ago that were renting out parts there. And they used to come to me and say, I got $20,000 this year just for, it was a little piece of land that should be worth nothing to them. And they thought was great because of the cell phone towers. But space has become, yeah, valuable. Even on top of office towers, you see them renting the roofs to have different communications on there. So that’s one piece, but what are some other ones, Rob?
Rob (01:54):
So some of the other sectors in the real estate market, you’ve got infrastructure, okay? So infrastructure, when we typically think of infrastructure, we think of roads, rail lines. You think of sewer systems and things like that. But you’ve got to use up a lot of government land for that infrastructure. Lodging in resorts would be a whole other sector. So lodging, maybe small places. Resorts, we would think of the big places. Not just in Canada and the US, but all over the world you’ve got resorts.
Rob (02:30):
You get into then, obviously residential. So residential can be many parts of residential. You can have houses, you can have condos, townhouses, multi-use condo developments. You then get into diversified real estate. So, where someone has, it’s a specific real estate company. But rather than having just one category that it invests in, it invests in multiple categories. You would have timber companies. So just think of the land that is owned by some of the timber companies, and they harvest trees on them. And they grow the trees and they harvest them. That land is extremely valuable. What are some other categories, Mike?
Mike (03:14):
Well, I guess even when you talk about that too, is there’s a two-piece to this stuff. There’s the real estate that exists and then there’s development too, right? So even when you think of housing, we see a lot of investments I’m never crazy about, but they’ve been doing development projects for the last 10 years. And they’ll buy land with the hope of moving into the future and having that go up in value. So that’s a big piece. It might be residential, but there’s a couple different ways to buy residential, right?
Mike (03:38):
When you go into other things that are out there, there’s companies that are doing mortgages. They’re providing the financing for all this, so there’s a lot of money being made in there. When you look at the average price of a home and how much it’s went up in the last 10 years, before a home used to be $600,000, people were taking a $400,000 mortgage. Now houses are 1.6 million and they’re taking a $1.2 million mortgage. So those mortgage companies are making a percentage of what their, the values going out. So that’s going to make money.
Rob (04:07):
And the money has to come from somewhere, right? It’s not all coming from the banks.
Mike (04:10):
There’s timber in Canada. There’s office real estate. There is healthcare. There’s even senior homes. There’s healthcare areas. So there’s all different parts of this healthcare portion.
Rob (04:23):
You’ve also got retail. Now retail’s had a rough go, as we’ll see soon when we look at some of the numbers, but retail is everywhere you turn. And it’s not just in your own country, it’s everywhere around the world, is retail. Another big one, self-storage. That wasn’t something that I had to play any role in, and then suddenly, now I own three self-storage units. Well, I don’t own them, I’m paying for them. Because we’re rebuilding the main cottage, and so we’ve had to store everything. And not only store everything, the old furniture that we had, if we buy new furniture, we put it into a storage unit. And we’ve even had to store some of the timber supplies for the cottage.
Mike (05:05):
I always find it funny because whenever we get into things like this, you never realize why the business exists until you have to use it. I never understood the value of Facebook and Google. And I was going through our budget last month and I saw how much we had to spend on Facebook and Google advertisement, and now I know why the company has value to them. So self-storage is something, well, that’s for other people, until you have to use it.
Rob (05:26):
Well, you wonder, up in Muskoka, why do people need to store their stuff? But people have lots of toys and they need to store it.
Mike (05:33):
True. And I guess even within our business, there’s Iron Mountain. We pay a fee to Iron Mountain every month, and they’re storing files. And it got to the point where the storage of files would’ve been our whole building. So we now have to pay, and I’m sure every other financial advisor in all of Canada. And I’m sure every person with insurance companies and any type of compliance that’s involved in your business and you have to maintain old files, is going to Iron Mountain.
Rob (05:57):
And I guess the last one would be industrial, and whether, Industrial is all over the map, all over the world. You’ve got industrial land that is buildings, manufacturing, you name it. So what are some of the best performers? And I’m looking specifically, not long term. We’re really looking over the last 10 years, ending in 2021.
Rob (06:18):
So I’ll start with the worst. The worst performers, no real surprise, hotels and resorts. In the last two years alone, down 23.6%, down 6%. They’ve lost money in the last three out of four years. It’s been a really rough go. And some of them have gone under, for sure.
Mike (06:38):
Pandemic has just destroyed. That industry is having a very big struggle right now. When you think of these, the hotels that had the big conferences before, think of the issues they’re coming into. And what people forget is when they open up, everyone expects the hotels to be able to open up and have a conference with 5,000 people in there. Do you know how hard it is to cook for 5,000 people? Do you know what type of chef you’d need to be able to do this type of thing?
Mike (07:02):
And they’ve said over the last few years, they’ve had to keep these chefs on. Just paying them to lose money, because they need the staff. Because otherwise, it would take them four or five years to reopen. So they need to keep these guys on payroll.
Rob (07:16):
And what’s interesting, just in Ontario, we’ve announced that some of the pandemic rules are changing. Restaurants are going to be able to go to full capacity. The problem is they don’t necessarily have the employees or the food or supplies to go to full capacity.
Mike (07:35):
You need a trained staff, particularly when you’re, and your food. Think of the dangers that involves. We talk about investments, but we’ve seen food crisis before. We’ve seen salmonella. We’ve seen what happened with, I think it was Maple Leaf Foods a bunch of years ago when that all happened. We’ve seen these crises happen just through poor handling of foods. So now as restaurants open up, you want to make sure you have a staff that knows what they’re doing. You can’t just hire people off the street.
Rob (07:59):
Another area that’s struggled, surprisingly, over the last 10 years is healthcare. Down 10%. It was in fifth place and 10th place over the last two years, it’s been a little better. But it’s been the second-worst performer over the last 10 years. Now, that’s a surprise. I would’ve thought healthcare might have been okay over that time period.
Rob (08:17):
What are some of the better performers? Where have some of the growth areas been over, at least the last 10 years, in real estate?
Mike (08:27):
Well, I saw your notes. Self-storage, mainly because of you.
Rob (08:32):
You’re saying I drove up prices because I needed three units, not just one? And these units aren’t small, they’re the size of, like a transport truck.
Mike (08:42):
Well, it’s up 57.6%, so that’s pretty impressive performance. But self storage has always been an interesting one because it was always a play against a recession. So they always said to make sure if you have self storage, because when you go into recessions and businesses close down, everything goes in storage. Even when people lose their houses, things go into storage. So it was also a very recession proof stock to happen. We haven’t been through a recession, but I guess the pandemic has created a recessionary type event.
Rob (09:10):
There you go. So just in the last two years, up 57.6% and up 13%, first and first. If we look at the second best performer, industrials. Up 45% last year, up 12% the year before, and the year before up 48%. So three great years in a row. It was first, second, and third in each of those different years.
Mike (09:35):
Well, think. We’ve went from real estate, Where do you do most of your shopping now? Is it at a mall or is it through Amazon?
Rob (09:39):
It’s through Amazon.
Mike (09:41):
They have to store the stuff, right? And I ordered a book from Amazon yesterday, Sorry, it was on Thursday. It was there Friday morning, right? So somewhere, They didn’t have that book. It wasn’t coming over from China. It was there at my door within 12 hours after I ordered it. So somehow they’re keeping warehouses close enough where they can get things to you in a relatively short period of time.
Rob (10:02):
Really fast period of time. And how many hands had to touch that little piece? So you need those big factories or manufacturing facilities, storage units. I mean, think of some of the, You’re driving along some road and suddenly you see this Amazon building. You’re like, oh, I didn’t know that was there before.
Mike (10:21):
Yeah. Well, life has changed, and it’s funny. And you know me, I’m always doing work around cottages or working on vehicles and things like that. No one carries anything in stock anymore, it’s not worth their while. When you get parts that cost three or $4, it’s not worth the shelf space. So everything you have to fix anything nowadays you have to do through Amazon. And it’s okay. They’re pretty quick with the their delivery, and it’s pretty fast. And it’s actually sometimes more convenient than having to go to 10 stores to find the parts. But that’s how you have to do things nowadays.
Rob (10:54):
So we’re then going to talk about volatility. And not all of these things pump out a steady 8% a year they, they go up and down. So some of the more volatile areas, certainly timber. Lumber prices are always going up and down. Lodging and resorts we’ve already talked about, extremely volatile. Surprisingly, self storage, for something that looks like it would have pretty steady income, is very volatile. Retail. And of course, residential. So those are the most volatile areas.
Rob (11:27):
What are the more stable areas, Mike? Where would you want to put your money?
Mike (11:31):
Industrial has been very solid. Mortgages, just because we had a rise in the real estate market. So when you have that going on for this extended period of time, the mortgage company’s going to do very well. Infrastructure. Infrastructure’s always very solid, particularly as you move the government more toward, let’s say a liberal government. There’ll be more money put toward infrastructure on that side. So that will create a lot of money in those areas.
Rob (11:56):
It’s got a little government funding. And I guess the last one that’s least volatile, surprisingly is office. And that’s because a lot of the office space are longer term leases. And so even though some of those offices have been empty, they know that they’ve got a long-term lease with, maybe it’s a bank, that’s a client, or something like that. If we look at the 10 year return though, We looked at more recent performance. If we look at the 10 year return, the best 10 year, the best places to have your money in the last 10 years, number one, what was it?
Mike (12:31):
Oh, industrials.
Rob (12:33):
Up 21%. If we look at mortgages, up 16%. Infrastructure, 14. Those are good double digit returns. Now, would you have known 10 years ago that industrial, mortgage, and infrastructure would be the best places to be? Probably not. Where would you have gone wrong?
Mike (12:54):
Retail. I mean, it seems obvious now with the pandemic, but before that you wouldn’t have guessed, I mean, when you look at long term, you could see a bit of a fall in the retail market happening over time. We talked about that before the pandemic even hit. The idea that, We think this pandemic brought on this Amazon shopping. It sped it up quite a bit. It’s not a change in what was going to happen anyway. We could see that malls, Many years ago, we watched Eaton’s go down. We assumed the Bay wouldn’t be far after it.
Rob (13:25):
Well, you saw all the department stores basically go under. I don’t know how Hudson’s Bay is still surviving in Canada.
Mike (13:32):
But somehow we knew that was a road that everyone was going down. Residential is surprising. Residential, how that’s been over the last 10 years. You’d think with housing prices that it would be a great place to be in, but it hasn’t been as good as you think.
Rob (13:47):
But you’re looking, again, over the world. You’re not just looking necessarily at Canadian real estate. You’re looking all over the world. The other one that has been poorer over the 10 year period has been healthcare. Some interesting ones we touched on, timber in 2018, down 32%. That was all about trade wars. Nothing to do with what was going on in the marketplace, it was all about trade wars. Which I guess is what was going on in the marketplace, but it wasn’t supply demand.
Rob (14:15):
And then as we talked about, storage units up 57%. So if you pick the right sector and the right year, you can really hit a home run. At the end of the day, do you want to try and pick the right sector? Do you want to try and pick the right country, the right property? It’s so much easier just owning the global marketplace in real estate.
Mike (14:35):
Yeah. It’s a much simpler route, and you get relatively same return. When I look at all the problems that people go through to look at real estate, I look at the REIT funds and their production, it’s not worth having to deal with tenants, having to deal with all these extra parts you have to do. We have many clients who’ve been involved in real estate development too. And I haven’t heard many good stories from them in how this has worked. People think it’s a lot easier to make money than it is. The cost now of developing properties is so expensive, the government cost to get these things developed, and to try to create that is huge. And there’s not as much money in that as you would’ve thought.
Rob (15:16):
So I don’t have to deal with the government. I don’t have to deal with the banks. That’s a pretty good deal. And I can get a steady return over time. Yes, it goes up and down. It’s not perfect every year. But that’s a pretty good place to put some of your money.
Mike (15:29):
And another key too, is liquidity, right? The biggest problem with real estate, when we look at all the stuff that we talk about, when you decide to own real estate on individual basis, if you’re not actually going to the REIT sides of things is there’s no liquidity. Even some of the individual REITs that you buy when you don’t buy a REIT fund, even those have liquidity issues. And liquidity issues are fine when everything’s going well, liquidity issues happen when things turn bad. And that’s when you generally need the money.
Rob (15:55):
That brings us to the end of another week. Thank you for joining us. This is Rob and Mike with Think Smart, from The McClelland Financial Group of Assante Capital Management, reminding you to live the life that makes you happy.
Assante Capital Management (16:07):
You’ve been listening to The McClelland Financial Group of Assante Capital Management Limited. Assante Capital Management Limited is a member of the Canadian Investor Protection Fund, and the Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate and Insurance Services Incorporated. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources. However, no warranty can be made as to its accuracy or completeness. Before acting on any of the previous information, please make sure to see a professional advisor for individual financial advice based on your personal circumstances. The opinions expressed are those of the authors and not necessarily those of Assante Capital Management Limited.
