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The traditional 60/40 portfolio composition is changing. There’s now a shift to a 50/30/20 portfolio, where 50% is equities, 30% is fixed income, and 20% is alternatives. Alternative investments are financial assets that don’t fit into conventional investment categories, and can include private equity or venture capital, hedge funds, commodities, and real estate. Private apartment funds, focused on rental apartments, are an increasingly popular choice for investors seeking real estate exposure.
Private apartment funds may provide an alternative source of income and growth, says Geoff Lang, Senior Vice-president, Business Development, at Equiton, that could be a complement to traditional portfolios.
2022 showed how private apartment funds may complement portfolios, he explains. “Both the equity and fixed income markets were down double digits,” says Lang. Building a portfolio that has exposure to different asset classes “can be extremely valuable in further diversifying investors’ portfolios.”*
“Investors need to keep pace with inflation. It’s expensive living in Canada, so we have to make sure our money is working for us.”
Lang notes that many investors are on the hunt for yield and private apartment funds could be a solution.
There’s also potential for tax efficiency**. Private apartment funds reporting no taxable income may classify distributions as return of capital, which defers taxes until an investment is sold by reducing an investor’s adjusted cost base. This increases an investor’s capital gain at time of disposition.
“The tax deferral can be very helpful when it comes to tax planning,” says Lang. “As long as taxes aren’t incurred, it also allows more of your investment to compound over time.”
“Lastly, you’re investing in a real physical asset,” he says. “You can see the buildings. You can touch the buildings…there’s something to be said for that.” Even though private apartment fund investors receive pro rata trust units of the portfolio, the ultimate asset they’re supporting is a physical one, which can be easier for investors to understand.
Considerations before investing
As with any asset class, there are several considerations before adding private apartment funds to investors’ portfolios.
The first is investor suitability. Lang outlines that investors best suited to invest in a private apartment fund have a longer investment horizon – 5 to 10 years – and are medium to high risk. There are other considerations when assessing suitability, among other things, the respective fund’s characteristics.
And that’s because liquidity can be a concern. Many private apartment funds provide monthly or quarterly liquidity, he notes.
“Anyone who is looking to invest in private [apartment funds] should know that if you buy today, you can’t get out tomorrow,” he says. “It depends on the type of investment you’re investing in.”
Why private apartment funds right now?
In periods with falling interest rates, yields often drop.
“Investors need to keep pace with inflation,” says Lang. “It’s expensive living in Canada, so we have to make sure our money is working for us.”
Private apartment funds are designed to deliver income derived from rents and leases, explains Lang, and are backed by tangible properties that may grow in value, potentially providing regular income and growth, through various market conditions.
The Equiton Real Estate Income Fund Trust (The Apartment Fund) aims to provide attractive yield and tax-efficient income. Its “sweet spot” is mid-rise apartments in growing neighbourhoods, shares Lang.
There’s more demand for apartments in Canada overall, since “buying a house isn’t affordable for many,” he adds.
“The Apartment Fund is designed to offer investors tax-efficient income** on a monthly basis, which can be viewed as a real value-add. We know we’re an alternative, but one of the roles and responsibilities when working with advisors is to mitigate risk as much as possible for end investors. If the investor has the appropriate risk profile, private [apartment funds] can be a great alternative.”
Read about how private apartment funds may be an all-weather strategy.
Click here for more information on Equiton’s Apartment Fund.
* Private market securities may be subject to higher risks, including limited liquidity. These investments may not be accessible or suitable for all investors. Consult a registered dealer for more information.
** Not to be construed as tax advice. For specific tax advice, consult a tax professional.
Equiton Capital Inc. (“Equiton” or “We”) is registered as an exempt market dealer, investment fund manager, and portfolio manager in multiple provinces and territories across Canada. We may trade in, or advise with respect to, securities of issuers that are “related” or “connected,” which can create conflicts. These conflicts are managed through disclosure, including our relationship disclosure document.
This communication is for information purposes only and is not, and under no circumstances is to be construed as, an invitation to make an investment with Equiton Capital Inc. or securities of certain issuers that are related or connected to Equiton Capital Inc. (“Related Issuers” or “Related Issuer”, as applicable). Investing in Related Issuers involves risks. Recipients of this document who are considering investing in Related Issuers are reminded that any such purchase must not be made on the basis of the information contained in this document but are referred to the applicable offering memorandum associated with the Related Issuer. A copy of an offering memorandum associated with a Related Issuer may be obtained upon request made to the attention of Equiton Capital Inc. All information contained herein, while obtained from sources which are believed to be reliable, is not guaranteed as to its accuracy or completeness.