The pullback from traditional lenders in the real estate market is poised to create a serious need for capital.
“To a certain extent, banks [and other large capital providers] have generally been overexposed to real estate,” said Ken McKinnon, senior managing director and equity partner at Institutional Mortgage Capital, during a session at the Canadian Investment Review’s 2024 Defined Benefit Investment Forum.
The exposure is primarily within single-family homes and condominiums, he added, while creating an opportunity in other real estate asset classes that’s only exacerbated by a high interest rate environment.
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The current market is offering institutional investors a limited opportunity to review their managers and ask them how they’ve dealt with the challenges over the last couple of years, said McKinnon.
In addition, as Canada faces a housing shortage due to unprecedented population growth, a variety of capital sources will become essential for the real estate market, he noted. “Somehow, the amount of debt that will be required to build out the country over the next decade will require a lot of capital from a lot of different places, including from private lenders.”
Technology has also impacted the risk/reward dynamics attached to real estate, he said, including in office real estate with many workers moving to a hybrid model that makes office use more flexible.
It’s taken about a decade for the impact of e-commerce to be fully understood in the way retail businesses work and think, noted McKinnon. “Not to say that e-commerce has replaced retail, but when you take away 10 per cent of your demand and you put it elsewhere, that had an effect on the entire sector. It has stabilized and recovered, but [that] didn’t happen overnight.”
These changes are showing institutional investors the benefit in allocations that also focus on shorter timeframes that are typical of private lending compared to the more traditional long-term holding periods in the real estate space, he said.
Read more coverage of the 2024 DB Investment Forum.