A little over one year ago, Inc.com published “How to Start Investing If You’re Scared of a Stock Market Crash”. The financial publication offered a few pointers for investors worried about the next bear market, listing investing in real estate as one of the best ways to mitigate risk in a volatile market.
In this article we’ll discuss the correlation between stocks, bonds, and real estate, and why investing in Vancouver real estate with Tycon Capital can offer the type of risk-adjusted returns that investors are seeking today.
Historical returns of stocks, bonds, and T-bills
Investors have access to a wide range of data points to help determine potential risk-adjusted rewards of alternative investments compared to stocks, bonds, and T-bills.
Let’s begin by looking at the average annual returns of traditional types of investments, then review the historical performance of investing in Vancouver real estate:
Type of investment
5 year average annual return
Canadian dollar 3 month T-bills
Canadian dollar government bonds 1-3 year
Canadian dollar government bonds over 10 years
S&P/TSX Composite Total Return Index
European stocks in Cdn$
Emerging market stocks in Cdn$
Emerging market stocks in Cdn$
Nikkei 225 TRI
S&P 500 Index in Canadian dollars (Cdn$)
While some of the above returns are attractive, they don’t come close to the potential profits of investing in the Vancouver real estate market. In fact, over the past six years, Tycon Capital’s founders have generated annual yields of between 19.3% and 37.6%.
In addition to possible returns from real estate in Vancouver about 2X those of traditional investments, there’s another reason why investors are increasingly diversifying their portfolios with real property.
Low correlation between stocks and real estate
Correlation is a statistic used by investors to measure the degree that two assets or investments move when compared to one another.
For example, when oil prices rise the exchange rate of the Canadian dollar does as well. In this case, oil and the loonie can be described as having a high or positive correlation to one another.
On the other hand, when interest rates rise the prices of existing bonds fall, because new bonds are issued with a higher coupon (or interest) rate. So, interest rates and bond prices are described as having a low or negative correlation.
Many investors think of stocks, bonds, precious metals, commodities, and real estate as being part of one huge asset class. However, the fact is that investment real estate has a low correlation to the performance of equities.
That’s one reason why a growing number of investors view investing in real estate as a strategic way to diversify portfolios. Nearly 10 years ago, J.P. Morgan Asset Management analyzed the historical performance of real estate to the performance of stocks and bonds. The firm discovered that:
- Performance of real estate is historically mid-point between stocks and bonds, delivering bond-like yields with significantly lower volatility when compared to stocks
- Real estate offers stable returns that can increase proportionally to cash flow as rents and property prices rise, unlike bonds which offer a fixed coupon rate
Real estate market cycles are predictable
A recent article from the Harvard Extension School reports that as far back as 1876, researchers noted that real estate markets inexorably move through cycles that can be “predicted with a stunning degree of accuracy.”
In fact, the real estate cycle has regularly run an 18-year rhythm since 1800 with just two exceptions: World War II, and the Federal Reserve’s doubling of interest rates in 1979, the last of which arguably contributed to the 1981 housing market crash in Canada.
For over 200 years, real estate markets have followed four distinct phases:
Phase I: Recovery begins from a market bottom that is characterized by high unemployment, decreased consumption, and decreased capital investment by business in buildings, factories, and machines. The price of real estate is at its lowest point in the cycle.
Phase II: Expansion occurs when investors have purchased or rented most available property, occupancy begins exceeding the long-term average, and an imbalance between supply and demand allows property owners to begin raising rents.
Phase III: Hyper Supply develops as builders add more and more product to the market while demand is high and rents are growing. Eventually, an increase in unsold inventory and rising vacancies lead to the next phase of the real estate cycle.
Phase IV: Recession is the next indicator of trouble in the market. Even though occupancy falls below the long-term average, product already in the construction pipeline continues to be delivered to the market. This oversupply pushes occupancy rates and rents lower still, reducing net operating incomes from rent and decreasing real estate market values.
Based on this 18-year real estate market pattern, the next market peak should have occurred in 2024. Although the cycle can’t be used to pinpoint the exact year when the market peaks, the 200 years of history suggests the real estate cycle would have peaked in the next few years with or without the COVID-19 crisis.
If this pattern that’s been occurring for two centuries holds true to form, we’ve likely entered the bottom phase of the normal real estate cycle.
Investing in Vancouver real estate post-COVID 19
Over the past 40 years, land reserves in Vancouver for residential and commercial development have been steadily shrinking. The City of Vancouver is proactively protecting existing vacant land from being developed, and instead encouraging densification of the city’s current housing mix.
Single-family lots represent the largest class of untapped land in the city. At the current price per square foot – in particular during the COVID crisis – residential lots in Vancouver also offer the highest rate of annual return when compared to alternative investments.
Tycon Capital wisely uses the HRA and MCD bylaws to develop projects the City of Vancouver wants and needs, while providing sound investment returns by adding value through retention and densification of single-family neighborhoods.
Our projects are asset backed and high-yielding, with annual preferred rates of return ranging from a minimum of 8% up to 15%:
- 2515 West 8th Avenue: 4-unit HRA development completed 2017. Gross profit of $1,477,572 with an ROI of 113%
- 2426 West 8th Avenue: 3-unit new construction completed 2018. Gross profit of $1,164,930 with an ROI of 77%
- 2045 West 15th Avenue: 4-unit HRA development completed 2019. Gross profit of $975,175 with an ROI of 59%
Hold times are short to medium, with projects generally taking between 1-3 years from start to finish. Investors may exit at any time, although early termination penalties may apply.