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Written by Adam Othman at The Motley Fool Canada

Royal Bank of Canada recently lowered its forecast for the national housing market. With new interest rates putting pressure on mortgage affordability and variable rates moving closer to fixed rates, Canada’s largest bank expects an extremely aggressive correction. The projected 42% decline from the 2021 peak in the number of home resales is even higher than the 38% during the Great Recession.

The Canadian housing market was overinflated even before the pandemic and low interest rates, which made borrowing much easier and accelerated the market to a dangerous pace. The housing bubble has grown disproportionately, and now that it’s pop, it would be on a similar scale to the growth of 2020-2021.

But what does this mean for investors? Should they sell their property assets to realize the capital gains before the market normalizes prices for years to come? Or should they wait and see how the market performs after the current “cooling” period ends?

There are no easy answers to these questions, especially when we have yet to see the full extent of the correction. Actual resale numbers remaining lower or higher than the RBC prediction could give people more information to work with.

Largest REIT in Canada

Canadian Apartment Properties REIT (TSX:CAR.UN) in Canada is worth considering as an investment, even in today’s housing market, for more reasons than just its title as Canada’s largest REIT. The first reason is its performance. It increased its market value by more than 200% in the decade before the pandemic. This represents a growth rate of around 20% per year, which can double your capital in five years.

He is also a dividend aristocrat. And while the return is generally low due to capital appreciation, it’s currently 3%, thanks to the 25% decline in stock value. The payout ratio hasn’t even crossed the 50% mark in the last decade, which speaks to the financial stability of the dividend and its potential for sustainability.

The REIT is currently both discounted and undervalued. Even though it may experience a devaluation of its portfolio (residential properties), if rents do not drop significantly, the REIT may be fine (financially). And the stock may hold steady and possibly start growing at its pre-pandemic pace.

Another apartment REIT

Killam Apartments REIT (TSX:KMP.UN) is a relatively smaller apartment REIT, both in market value and portfolio size. But the growth potential is quite similar to that of Canadian apartments. The Killam apartment stock also grew by around 100% in the five years leading up to the crash of 2020, the same rate of growth (in a bull market).

It also offers the same discount and almost the same valuation, but the yield is much higher at 3.95%. The REIT has also been increasing its payouts at a steady pace over the past few years, and its payout ratios have remained fairly stable since 2016.

Killam is a sound real estate investment, especially at the current discount, both for its potential for capital appreciation and for its dividends. The current housing market may be driving investors away from real estate assets, and REITs like Killam can help fill the void.

Insane takeaways

We could see a drop in property investment in Canada, given that many of the “investors” tend to use financing to purchase their assets. Now that interest rates are higher than they have been in years, this is not a financially feasible option. But REITs, even residences like Killam and Canadian Apartments, remain viable options.

The post Real estate investors: sell or hold as the correction approaches? appeared first on The Motley Fool Canada.

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Fool contributor Adam Othman has no position on any of the stocks mentioned. The Motley Fool holds positions and recommends Killam Apartment REIT.

2022

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