Why are single-family rental (SFR) homes a compelling investment? How do SFR investment properties compare to other investment alternatives? And why SFR in the context of today’s investment landscape?
At Konfidis, the “why SFR” story starts with supply and demand fundamentals. While there are various factors impacting the outlook for SFR investment, the Ontario landscape is primarily founded in a secular mismatch between quickly increasing demand for single-family and rental housing and a stalled pace and availability of new housing supply.
INCREASING DEMAND. Demand for single-family and rental housing is primarily driven by immigration and population growth. According to Statistics Canada, Canada’s population grew by nearly 285,000 people in the second quarter 2022. That amounts to a 0.7% increase — the largest Canada has experienced since 1949, when Newfoundland and Labrador joined Confederation, according to a recent note from CIBC’s chief economist Avery Shenfeld.
But just think about these numbers for a moment. At that pace, which admittedly is unlikely to be fully sustained, the country would add the equivalent of a fresh city of more than a million people every year. The immigrants coming into this country aren’t turtles; they don’t carry their housing on their backs. To continue to attract these inflows, and to avoid squeezing out those already here from their housing needs, we can’t afford much of a lull in housing construction.
Within the single-family rental segment, immigration isn’t the only driver of increased demand. Demographic trends and changes in social preferences (including the prevalence of work from home) translate into a dominant millennial cohort seeking larger format housing – trading “shoebox in the sky” urban condos for larger format housing with extra bedrooms for family planning and at-home offices. This trend further bolsters single-family rental demand in Ontario’s secondary cities outside of core Toronto, for example.
STUNTED NEW SUPPLY. With this backdrop of a federal open-door immigration policy accelerating housing demand, one would reasonably expect that local municipal and provincial policies would support and encourage new housing development to meet this demand – but the opposite is true. Political red tape and delayed approval timelines have slowed down the delivery of new housing stock and higher development and permit costs have significant increased construction costs and therefore the ultimate cost for the home buyer. A recent Altus Group report observed that the change in average approval timelines in the GTA were 27-51% longer in 2022 than just two years prior and municipal charges in the GTA continued to escalate significantly increasing on average by 30-36% since 2020. The resulting findings from the report were that delays in municipal approval timeframes have added up to $50,000 to the cost of a condominium unit and $100,000 to the cost of a new home.
In today’s investment environment dominated with volatility related to inflation and interest rates, geopolitical risk, and economic uncertainty, investors are left asking - where can I safely invest my hard-earned capital?
Konfidis highlights 3 reasons single-family rental (SFR) investment properties are an attractive additional to an investment portfolio.
1. Single-family housing is the most liquid and defensive real estate asset class in the world. Everyone needs somewhere to live, and homes provide an irreplaceable utility for families. Single-family rental income is bolstered by the strong individual credit profile of the tenant base, with such payments representing amongst most important spending (i.e. shelter) for families. This is in contrast to many stocks, for example, whose earnings quality is likely inferior with revenue driven by discretionary spending. Please also see here for a compare and contract of SFR to other real estate property types.
As an indicative proxy for single-family outperformance, please see the chart below comparing the performance of the US SFR REITs compared to the broader US residential REIT index over the last five year.
2. Strong supply and demand fundamentals (see above) bolster strong long-term home price appreciation. For example, the 28-city Ontario composite calculated by Konfidis experienced 6.4% 10-year annual growth prior to the recent pandemic spike (as at February 2020; see the table below for reference). And to clarify, this increase represents the unlevered appreciation, and without the benefit of rental income. Home price appreciation has accelerated since early 2020, even with the recent pull-back that appears to have plateaued.
Source: Teranet–National Bank House Price Index via CREA MLS HPI Tool; Compounded annual unlevered returns; 28-city composite calculated by Konfidis.
3. Single-family rental investing provides a hedge to inflation. Unlike a fixed coupon on a government and corporate bond, single-family rental landlords experience increased rental income during inflationary periods (see compelling rental growth dynamics below). Further, as inflation drives development costs higher, as a hard asset, real estate resale prices benefit from increasing replacement costs.
Source: Data drawn from CMHC’s Rental Market Survey of average rents for all rental types (including rental townhomes and apartments) in urban centres. Annual data as at October of each year.
With this backdrop, we share Konfidis’ insights of current market conditions.
Bolstered by its technology-advantage to identify the top single-family rental opportunities across Ontario, Konfidis has experienced a dramatic shift in recent months:
Home prices have pulled back approximately 10-30% (depending on the market) from the highs earlier this year and have generally seen a plateauing since August.
The market has shifted to a Buyers’ Market in which buyers can be selective, find deals, and receive supportive terms (such as conditional periods) that were not available in the market earlier this year.
At the same time, rental rates have spiked considerably as higher mortgage rates price marginal buyers out of the housing market and into the rental market – but with virtually no supply of rental housing available, especially in the single-family segment.
In combination of the above, rental income dynamics have improved significantly. For example, in London, Ontario (see Konfidis’ recent Konfidis Insights - Spotlight on London) the Konfidis platform is highlighting a deep availability of properties with rental dynamics north of a 6% rental yield; and the Konfidis strategy to find the needle in the haystack has produced 22 Bond Street, a property exclusively available for assignment by Konfidis (see below) at greater than a 7% rental yield. With these rental dynamics, the going-in economics for new buyers are very attractive and cash-flow producing, even with higher current market mortgage rates.
Konfidis Exclusive Deals Available for Purchase
22 Bond Street in London, ON
Suggested Assignment Price: $410,000
Full Due Diligence Report, including photos and projected financial return, is available here:
Comments from our Chief Investment Officer:
22 Bond Street presents a unique opportunity to acquire at a significant10 to 20%+ discount to comparable sold properties in the neighbourhood during recent weeks, including:
12 Raywood Avenue, London (Sold for $450,000 on Aug 25, 2022) and
731 Whetter Avenue, London(Sold for $501,000 on Sept 26, 2022).
While 22 Bond Street provides a turn-key, immediately rentable opportunity, the property also hasupside for inclusion of secondary rental suite for those investors interested in a manageable project for enhanced yield.
Contact us at hello@konfidis.com to purchase this property.