Canada’s National Housing Strategy (NHS) is a $55 million, 10-year plan unveiled by the federal government to reduce chronic homelessness by building 125,000 new homes across the country.

Authors

Grant Alexander Wilson, Ph.D., Assistant Professor, Faculty of Business Administration, University of Regina

Jason Jogia, MBA, M.Fin., Chief Investment Officer, Avenue Living

Author Bios

Dr. Wilson is an Assistant Professor at the Hill and Levene School of Business, University of Regina. His research focuses on marketing, strategy, and innovation. He has published over 20 peer-reviewed articles in top management journals including Journal of Small Business Management, Research-Technology Management, and Journal of Business Strategy. His research has been featured in the National Post and by the World Economic Forum. Dr. Wilson is also a research consultant and contributor to Avenue Living Asset Management.

Mr. Jogia is the Chief Investment Officer at Avenue Living and has over 15 years of experience in real estate capital markets, originating over $10 billion in real estate loans and $1 billion in equity. He has extensive experience in real estate investment analysis and capital structure across various real estate classes. In addition to holding 2 Masters’ degrees in Finance, Mr. Jogia is pursuing his Doctorate of Business Administration and currently serves as an instructor at the University of Calgary, specializing in real estate finance.

INTRODUCTION

According to the Bank of Montreal (2020), 77% of Canadians have investments. Of these investments, Canadians are “nearly split when it comes to investing their savings (53%) or keeping them as cash (47%)” (Bank of Montreal, 2020). The data further suggests that most of these positions are in conventional investments. Conventional investment “categories include stocks, bonds, and cash” (Chen, 2021). Paraphrasing Rose (2019), the average investor believes that the key to personal wealth is throwing money into the stock or bond market. In contrast, a study by Fidelity Investments found that wealthy individuals were likely to accumulate it through real estate investments (Sightings, 2018). Alternative investments such as real estate are “all the rage as advisors and clients search for fresh income” during the COVID-19 pandemic (Burton, 2020). Currently, the conventional portfolio is no longer adequate, as fixed-income investments (e.g. bonds) are offering nominal returns and equity markets (e.g. stocks) are more volatile due to market uncertainty (Bank of Canada, 2021; Yahoo Finance, 2021a). As such, participation in alternative investments is growing among savvy investors (Burton, 2020).

ALTERNATIVE INVESTMENTS

Alternative investments do not fall into conventional investment categories (e.g. stocks, bonds, or cash). Examples of alternative investments include private equity, hedge funds, managed futures, commodities, derivative contracts, and real estate (Chen, 2021). Traditionally, mostly accredited or institutional investors hold alternative investments (Chen, 2021). In Canada, an accredited investor is defined most commonly as an individual that has net assets of more than $5,000,000 or earns over $200,000 per year (The Ontario Securities Commission, 2009). “An institutional investor is a company or organization that invests money on behalf of other people” (Chen, 2020). According to Chen (2020), collectively, institutional investors are the “largest force behind supply and demand in securities markets.” Due to their size, institutional investors have opportunities not typically available to retail investors. “A retail investor is an individual or non-professional investor who buys and sells securities through brokerage firms or savings accounts” (Palmer, 2019). Today, accredited and institutional investors are actively participating in alternative investments due to their advantages over conventional investments and increasing accessibility. Specifically, alternative investments are becoming more feasible for retail investors via real estate investment trusts (REITs) and other securitized assets.

ADVANTAGES OF ALTERNATIVE INVESTMENTS

Alternative investments have numerous advantages over conventional investments. These advantages include counterweight to conventional assets, portfolio diversification, and inflation hedge. A counterweight investment is one that often responds inversely to another investment. For example, when stocks fall, bond prices often rise (Leonhardt, 2019). As such, alternative investments can act as counterweights to conventional investments, reducing the overall risk profile of an investment portfolio. Similar to counterweight investments, diversification reduces risk. “Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting exposure to any single asset or risk” (Segal, 2021). Due to the loss of purchasing power resulting from inflation, Milton Freidman describes it as “taxation without legislation” (Shaw, 2009). Accordingly, prudent investors have explored ways to hedge against inflation. “An inflation hedge involves investment in an asset that is expected to maintain or appreciate in an inflationary period” (Wilson, 2021). Historically, alternative investments such as Canadian residential real estate and farmland have served as inflationary hedges (Wilson, 2021). The greatest benefit of alternative investments is the potential return. Despite the articulated benefits, alternative investments have drawbacks.

DISADVANTAGES OF ALTERNATIVE INVESTMENTS

Shortcomings of alternative investments include valuation complexity, low liquidity, lack of regulation, and riskiness (Chen, 2021). Alternative investments are often difficult to value due to their non-public nature. Data collection and analysis are therefore problematic, as market prices are not widely available and the uniqueness of certain asset classes lack adequate comparables. A typically argued disadvantage of alternative investments is low liquidity (Chen, 2021). As compared to equities, most alternative investments are more difficult to sell. However, this argument is susceptible to a strong counterargument. The liquidity of any asset is dependent on the participation of buyers and sellers. Therefore, equities that are depreciating or not actively traded do not have such liquidity benefits, raising concerns related to the argument’s generalizability over alternative investments. “Alternative investments are often subject to a less clear legal structure than conventional investments” (Chen, 2021). In Canada, alternative investments themselves are not typically required to be licensed, authorized, or regulated (The Legal 500, 2021). Therefore, due diligence is paramount when participating in alternative investing. As with other investments, higher returns are most often accompanied by higher risks. However, this trait is not universal, as many alternative investments are more volatile than a conventional investment in the stock market.

CONVENTIONAL VERSUS ALTERNATIVE INVESTMENTS

To compare the historical performance of conventional and alternative investments in Canada, a series of analyses were performed utilizing publicly available data from some of the most common asset categories. Conventional investments included Canadian stocks, bonds, and interest on cash deposits. The Toronto Stock Exchange (TSX) is Canada’s primary stock exchange. Accordingly, the TSX Composite index was used to assess stock market performance. As the 10-year bond it is the most common fixed-income asset in Canada, it was used to assess the bond market. Canada’s cash deposit interest rate was used to evaluate cash market positions. Since alternative investments vary and publicly available information is limited, Canadian residential real estate, farmland, and commodities were selected for investigation. Canadian real estate was assessed by residential and agricultural properties. Canadian residential real estate was based on changes to existing home values and new home values. Farmland values were used to assess agricultural real estate performance. The performance of the commodity market performance was assessed based on the Bank of Canada’s (2021b) commodity price index (BCPI) because it includes 26 of the most important commodities produced in Canada and sold globally.

The 10-year appreciation of Canadian residential real estate supports Chen’s (2021) argument that alternative investments may generate stronger returns. Exploring changes to new and existing home values showed consistent annual appreciations totaling 21.50% and 11.18%, respectively (Statistics Canada, 2021; Global Property Guide, 2021) (Figure 1).

The appreciation of farmland was even more significant than residential real estate, as the average annual increase was 10.86% with a total appreciation of 119.50% (Farm Credit Canada, 2019; Farm Credit Canada, 2020) (Figure 2).

While Canadian alternative investments including residential and agricultural real estate markets showed consistent appreciations from 2010 to 2020, the same cannot be said for commodities. The BCPI’s 10-year average value change was -0.59% per year, totaling -6.53% (Bank of Canada, 2021b). Moreover, the examination of the annual changes to the commodity market relative to new home values and farmland explicates its volatility (Bank of Canada, 2021b) (Figure 3). Annual BCPI changes were extremely inconsistent ranging from gains of 21.37% to losses of 36.15%. Based on these comparisons in this timeframe, it can be concluded that Canadian real estate is advantaged over the commodities market. Furthermore, among the Canadian real estate investments analyzed, farmland investments were superior to residential real estate investments based on the 10-year appreciation.

Using new home values and farmland as comparables, they were analyzed with interest on cash deposits as well as 10-year bond yields and the TSX. Deposit interest in Canada fluctuated only moderately, averaging 1.00% from 2010 to 2020 (Trading Economics, 2021). Similar to cash deposits, 10-year Canadian Government bonds are characterized by low returns. From 2010 to 2020, with the exception of 2018, yields of newly issued bonds have consistently declined (Bank of Canada, 2021a). Unlike interest on cash deposits and the bond market, the TSX has shown annual gains of as much as 19.14% (Yahoo Finance, 2021a). A comparison of annual changes to new home values, land values, bond yields, and the TSX shows that real estate offers consistent appreciation and low volatility (Figure 4). Although annual appreciations of the TSX rival farmland values and exceed new home values, annual depreciation of similar magnitude are not uncommon. While the 10-year Canadian Government bond offers consistency, new bond values are low and continue to decline. It is apparent that in the Canadian context, positions in alternative investments such as real estate are more favorable than the considered conventional investments.

Inferences based on this investigation are not without limitations, as the analysis was performed with select Canadian investments. However, broadening the investigative context to include similar U.S. assets produced congruent results.

In addition to the previously analyzed Canadian assets, the New York Stock Exchange (Stock Market B), 10-year U.S. Government bond (Bond B), and S&P Goldman Sachs Commodity Index (Commodity Market B) were included in a reward and risk analysis (Table 1). Reward was measured using the 10-year average annual change of the asset value and risk was the standard deviation of the mean score. Standard deviation is the amount of variance among a set of values. If the values are “further from the mean there is a higher deviation within the data set” and there is greater variance (Hargrave, 2021). Therefore, risk was assessed based on the standard deviation of the asset value change. The reward and risk comparison showed that alternative investments in real estate had moderate to high rewards and low to moderate risks. In contrast, the stock markets presented high rewards and high risks. Inversely, the bond market showed low rewards and low risks. Although the commodity markets differed, both presented high risks. Although the data set was expanded to include U.S. assets, it is recognized that the analysis remains limited in scope. However, it was apparent that alternative investments such as real estate had benefits over conventional assets.

CONCLUSION

Today, investors are finding that conventional investment categories such as stocks and bonds are simply not adequate to preserve or generate wealth. As the global pandemic endures, there is an acute awareness of the benefits related to alternative investments among savvy investors. And rightfully so, as the analysis of select Canadian and U.S. conventional and alternative investments showed that residential and agricultural real estate balanced potentially appealing rewards with potentially lower risk. As stock and bond markets present extreme volatility, Warren Buffett’s first rule to “never lose money” and second rule to “never forget rule number one” are proving more difficult. Simply, investors need to have a clear strategy to include alternative investments in their portfolio for growth and risk management purposes (Pricewaterhouse Coopers, 2018).

REFERENCES

Bank of Canada. (2021a). Commodity price index. https://www.bankofcanada.ca/rates/price-indexes/bcpi/

Bank of Canada. (2021b). Selected bond yields. https://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/

Bank of Montreal. (2020). Majority of Canadians are investing, but many still prefer cash savings. BMO Financial Group. https://www.newswire.ca/news-releases/majority-of-canadians-are-investing-but-many-still-prefer-cash-savings-824362410.html

Burton, J. (2020). Rise of alternative assets part of ‘another revolution.’ Wealth Professional. https://www.wealthprofessional.ca/investments/alternative-investments/rise-of-alternative-assets-part-of-another-revolution/333598

Chen, J. (2020). Institutional investor. Investopedia. https://www.investopedia.com/terms/i/institutionalinvestor.asp

Chen, J. (2021). Alternative investments. Investopedia. https://www.investopedia.com/terms/a/alternative_investment.asp

Farm Credit Canada. (2019). 1985-2018 historic FCC farmland values report. https://www.fcc-fac.ca/fcc/about-fcc/reports/2018-farmland-values-historic-report-e.pdf

Farm Credit Canada. (2020). 2019 farmland values report. https://www.fcc-fac.ca/fcc/resources/2019-farmland-values-report-e.pdf

Global Property Guide. (2021). House prices in Canada. https://www.globalpropertyguide.com/North-America/Canada/Home-Price-Trends

Google. (2021). S&P GSCI. https://www.google.com/search?client=firefox-b-e&q=S%26P+GSCI

Hargrave, M. (2021). Standard deviation. Investopedia. https://www.investopedia.com/terms/s/standarddeviation.asp

Palmer, B. (2019). Institutional vs. retail investors: What’s the difference? Investopedia. https://www.investopedia.com/ask/answers/06/institutionalinvestor.asp

Pricewaterhouse Coopers. (2018). Rediscovering alternative assets in changing times. https://www.pwc.com/gx/en/private-equity/assets/rediscovering-alternative-assets-in-changing-times.pdf

Rose, J. (2019). 5 things wealthy people invest their money into. Forbes. https://www.forbes.com/sites/jrose/2019/08/20/five-things-wealthy-people-invest-their-money-into/?sh=2b9226c87017

Segal, T. (2021). Diversification. Investopedia. https://www.investopedia.com/terms/d/diversification.asp

Shaw, G.A. (2009). Taxation without legislation. Wall Street Journal. https://www.wsj.com/articles/SB10001424052748704402404574525980041136234

Sightings, T. (2018). 7 myths about millionaires. U.S. News. https://money.usnews.com/money/blogs/on-retirement/articles/7-myths-about-millionaires

Statistics Canada. (2021). New housing price index, monthly. https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810020501&pickMembers%5B0%5D=1.1&cubeTimeFrame.startMonth=12&cubeTimeFrame.startYear=1989&cubeTimeFrame.endMonth=12&cubeTimeFrame.endYear=2020&referencePeriods=19891201%2C20201201

The Legal 500. (2021). Canada: Alternative investment funds.

The Ontario Securities Commission. (2009). National Instrument 45-106. https://www.osc.ca/sites/default/files/pdfs/irps/rule_20090918_45-106_3238-supplement.pdf

Trading Economics. (2021). Deposit interest rate in Canada. https://tradingeconomics.com/canada/deposit-interest-rate

Wilson, G.A., & Jogia, J. (2021). Canadian real estate & farmland: A hedge against inflation. Avenue Living Asset Management. https://avenuelivingam.wpenginepowered.com/canadian-real-estate-farmland-a-hedge-against-inflation/

World Government Bonds. United States Government Bonds – Yields Curve. http://www.worldgovernmentbonds.com/country/united-states/

Yahoo Finance. (2021a). TSX Composite index. https://ca.finance.yahoo.com/quote/%5EGSPTSE/history?period1=1262217600&period2=1609372800&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true

Yahoo Finance. (2021b). NYSE Composite index. https://finance.yahoo.com/quote/%5ENYA/history?p=%5ENYA

This commentary and the information contained herein are for educational and informational purposes only and do not constitute an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This article may contain forward-looking statements. Readers should refer to information contained on our website at www.alamstg.wpenginepowered.com for additional information regarding forward-looking statements and certain risks associated with them.

Authors

Grant Alexander Wilson, Ph.D., Assistant Professor, Faculty of Business Administration, University of Regina

Jason Jogia, MBA, M.Fin., Chief Investment Officer, Avenue Living

Author Bios

Dr. Wilson is an Assistant Professor at the Hill and Levene School of Business, University of Regina. His research focuses on marketing, strategy, and innovation. He has published over 20 peer-reviewed articles in top management journals including Journal of Small Business Management, Research-Technology Management, and Journal of Business Strategy. His research has been featured in the National Post and by the World Economic Forum. Dr. Wilson is also a research consultant and contributor to Avenue Living Asset Management.

Mr. Jogia is the Chief Investment Officer at Avenue Living and has over 15 years of experience in real estate capital markets, originating over $10 billion in real estate loans and $1 billion in equity. He has extensive experience in real estate investment analysis and capital structure across various real estate classes. In addition to holding 2 Masters’ degrees in Finance, Mr. Jogia is pursuing his Doctorate of Business Administration and currently serves as an instructor at the University of Calgary, specializing in real estate finance.

SUSTAINABLE DEVELOPMENT

In order for human society to survive in the ensuing years, we must operate sustainably (Lawrence & Weber, 2014). This means conducting ourselves, individually and collectively, in a manner that does not destroy or deplete natural resources for future generations. As Nidumolu et al. (2009) aptly state “there is no substitute for sustainable development.” Sustainable development refers to development that adequately meets the needs of today, without compromising future generations’ ability to meet their needs (International Institute for Sustainable Development, 2020). As such, the balance between environmental protection and economic progress is at the core of sustainable development (Lawrence & Weber, 2014).

SUSTAINABILITY GOALS

The United Nations (2021a) created independent yet interrelated goals for sustainable development. “The 2030 Agenda for Sustainable Development, adopted by all United Nation Member States in 2015, provides a shared blueprint for peace and prosperity for people and the planet, now and into the future” (United Nations, 2021a). There are 17 priority areas for sustainable development including (1) no poverty, (2) zero hunger, (3) good health and well-being, (4) quality education, (5) gender equality, (6) clean water and sanitation, (7) affordable and clean energy, (8) decent work and economic growth, (9) industry, innovation, and infrastructure, (10) reduced inequalities, (11) sustainable cities and communities, (12) responsible consumption and protection, (13) climate action, (14) life below water, (15) life on land, (16) peace, justice, and strong institutions, and (17) partnership for the goals (Table 1). The final item, partnership for the goals, underscores the breadth of commitment required to achieve all objectives. Simply, achieving these sustainability goals is extraordinarily complex and it requires the participation of businesses, governments, civil society, and individuals (Lawrence & Weber, 2014).

BUSINESS RESPONSIBILITIES

“Business today is arguably the most dominant institution in the world” (Lawrence & Weber, 2014). As such, businesses are at the core of sustainable development and the traditional bottom-line measure of performance is no longer sufficient. Instead, Elkington’s (1997) triple bottom line is more appropriate, as it has been widely accepted as the optimal performance measure for over two decades (Elkington, 2018). The triple bottom line refers to a firm’s economic, social, and environmental obligations (Figure 1). It is based on stakeholder theory – the view that corporations serve to create value for all stakeholders, not just the stockholders – and argues that the responsibility and future success of enterprises will depend on their ability to make a profit, create value for people, and conserve the environment. According to Elkington (1997), sustainability is the intersection of the three perspectives.

“To some, adopting a triple bottom line approach may seem idealistic in a world that emphasizes profit over purpose. Innovative companies, however, have shown time and again that it’s possible to do well by doing good” (Miller, 2020). Triple bottom line does not value societal and environmental factors over economics, instead financial benefits are the long-term implications of this perspective. Narrowly focusing on short-term financial measures, impedes innovation and puts firms at competitive disadvantages in the long-term. Indeed, the triple bottom line perspective has grown due to its benefits and the importance of sustainability. The United Nations’ Sustainable Development Goals are forecasted to “generate market opportunities of over $12 trillion a year by 2030,” a sum so large no company can viably overlook (Elkington, 2018). While all industries will play a role in sustainable development, some will be more significant than others. An industry’s significance depends, in part, on the number of goal areas it impacts as well as its magnitude within these areas.

SUSTAINABLE DEVELOPMENT IN REAL ESTATE 

Sustainable development in real estate is highly salient, as real estate directly impacts many of these goals (e.g. poverty, infrastructure, cities, energy, etc.). Moreover, real estate’s influence on certain areas is second to none (e.g. carbon emissions and raw materials). According to the International Energy Association (2021), it is estimated that real estate accounts for “one-third of global final energy consumption and 40 percent of total direct and indirect carbon emissions.” According to Eichholtz et al. (2010), buildings are also responsible for 40% of raw material consumption. With population growth estimates, these conditions are likely to increase. However, with its challenges, there are also opportunities.

Among the many Rs of sustainability are reuse and repurpose. The continued use, renovations, and upgrades of existing rental stock for the future are of critical importance. Based on data from Canada, nearly 90% of the 2,126,060 residential rental properties were built before the year 2000 (Figure 2). This data shows that existing rental properties serve as the industry’s foundation. Although new sustainably-build properties are important, conservation and sustainability initiatives for the existing residential stock are arguably more important.

Retrofitting existing residential properties in an effort to improve energy efficiency is a core element of the United Nation’s (2021b) Global Alliance for Buildings and Construction. Upgrades to 30-year-old furnaces have been shown to increase efficiency, reducing energy waste, by as much as 40% (FortisBC, 2020). McGrath et al. (2013) also found that retrofits had energy performance benefits over existing and new builds. Specifically, McGrath compared pre-retrofit, post-retrofit, and new build scenarios over an 80-year period. Their results showed that pre-retrofits used 21,430 KWh/m², post-retrofits used 6,250 KWh/m², and new builds used 10,000 KWh/m² (Figure 3).

In addition to the energy efficiency, retrofitting produces less construction waste as compared to new builds. In McGrath et al.’s (2013) study of the environmental performance of retrofit and new properties, it was found that retrofits significantly outperformed new builds in the assembly and operational stages. The authors showed that retrofits reduced raw material usage and were overall more environmentally friendly scenarios.

Despite the many sustainability benefits, retrofits can have tenant displacement implications. The term renoviction, used by many Canadian provinces, refers to large-scale tenant eviction in order to renovate or repair a rental property (British Columbia, 2019). In fact, renovictions impede many of the United Nations’ (2021a) Sustainable Development Goals. Ideally, the retrofitting process should be undertaken without displacing individuals and families. Balancing the undertaking of renovations and maintaining residential stability is complex but necessary for the fulfillment of all sustainability objectives.

ADVANTAGES OF SUSTAINABLE REAL ESTATE

A mix of sustainability criteria in for-profit enterprises’ agendas, thus a triple bottom line, has not been shown to diminish competitiveness, but rather maximize performance (Porter & Kramer, 2006). Sustainable real estate is no different. According to Botosan (1997), “sustainable real estate in a broader sense improves the business position and competitiveness of firms.” Moreover, there is a large body of empirical evidence that suggests sustainable initiatives and triple bottom line perspectives enhance financial performance (Budzik-Nowodzińska, 2020; Cajias et al., 2012; Eichholtz et al., 2010; Fuerst & McAllister, 2010; Newell, 2009; Westermann et al., 2018). These findings span all areas of the world and demonstrate the multi-faceted financial benefits of sustainable real estate.

Westermann et al.’s (2018) reviewed empirical findings related to sustainable initiatives and real estate performance. The authors found general support for the link between corporate social responsibility and enhanced performance of real estate investment trusts (REITs). Specifically, sustainability “strategies have been a reaction to the changing environment REITs are operating within” (Westermann et al., 2018). REITs have adopted measures, targets, timelines, sustainability ratings, and reporting systems for regulatory compliance. As a result of its measurement and reporting, sustainability is strategically managed. After all, “what gets measured, gets managed” (Drucker, 1954).

Others have looked at specific areas of the world (Europe, UK, and US) when examining the importance of sustainability. Cajias et al. (2012) examined European real estate firms based on their differing levels of sustainability intensity and explored their agendas with performance. According to the authors, there was a positive relationship between sustainability strategies and performance. These sustainable commitments were also found to enhance employee attitude and morale, having long-term organizational benefits. Cajias et al. (2012) concluded that sustainable commitments were both altruistic and financially viable. Similarly, Newell (2009) found that property companies operating in the UK that practiced sustainable development enjoyed higher risk-adjusted returns as compared to their competitors. Eichholtz et al. (2010) and Fuerst and McAllister (2010) found that there were selling price premiums for sustainable properties. According to Eichholtz et al. (2010), the “variations in the premium for green office buildings are systematically related to their energy-saving characteristics.” Based on the results of the explored US properties, there was an 18:1 ratio of property value increase to energy savings, achieved through efficiency investments (Eichholtz et al., 2010). Fuerst and McAllister (2010) found further support for this in their study of US commercial real estate assets, as eco-certified buildings yielded rental and sale price premiums.

CONCLUSION

Sustainability is the only viable path for the future. Individuals and institutions need to commit to the United Nations’ Sustainable Development Goals, as they are the actionable steps required to meet the needs of today without jeopardizing the needs of the future. Sectors, like real estate, have large roles to play, based on the number of areas they impact and the degree to which they impact these goals. New real estate initiatives must be approached with a sustainable development perspective. Furthermore, there is a tremendous opportunity to engage in sustainability initiatives with existing real estate properties. Ultimately, these initiatives should not be met with opposition, but instead with optimism due to their long-term and multi-dimensional performance benefits. In short, empirical evidence suggests real estate companies do well by doing good.

REFERENCES

Botosan, C. (1997). Disclosure level and the cost of equity capital. The Accounting Review, 72(3), 232-349.

British Columbia. (2019). Renovictions. https://www2.gov.bc.ca/gov/content/housing-tenancy/residential-tenancies/ending-a-tenancy/renovictions

Budzik-Nowodzińska, I. (2020). Sustainable Management of Commercial Real Estate in the Context of Investment Performance. Finance and Sustainability, 61-75.

Cajias, M., Geiger, P., & Bienert, S. (2012). Green agenda and green performance: empirical evidence for real estate companies. Journal of European Real Estate Research, 5(2), 135-155. https://www.emerald.com/insight/content/doi/10.1108/17539261211250717/full/html

Canadian Mortgage and Housing Corporation. (2020). Rental market survey. https://www.cmhc-schl.gc.ca/en/data-and-research/data-tables/rental-market

Drucker, P. F. (1954). The practice of management: A study of the most important function in America society. Harper & Brothers.

Eichholtz, P., Kok, N., & Quigley, J. M. (2010). Doing well by doing good? Green office buildings. American Economic Review, 100(5), 2492-2509.

Elkington, J. (1997). Cannibals with forks: The triple bottom line of 21st century. New Society.

Elkington, J. (2018). 25 years ago I coined the phrase “triple bottom line.” Here’s why it’s time to rethink it. Harvard Business Review, 25, 2-5.

FortisBC. (2020). The costly truth about your old furnace. https://www.fortisbc.com/news-events/stories-and-news-from-fortisbc/the-costly-truth-about-your-old-furnace

Fuerst, F. and McAllister, P. (2010), Green noise or green value? Measuring the effects of environmental certification on office values. Real Estate Economics, 39(1), 45-69.

International Enegry Association. (2021). Buildings: A source of enormous untapped efficiency potential. https://www.iea.org/topics/buildings

International Energy Association. (2021b). Global alliance for building and construction: Urgent collective action on energy efficiency in buildings and construction is called for to combat climate change.

International Institute for Sustainable Development. (2020). Sustainable development. https://www.iisd.org/about-iisd/sustainable-development

Lawrence, P.R. & Weber, J.F. (2014). Business and society: Stakeholders, ethics, public policy. McGraw-Hill.

Lee, D. and Faff, R. (2009). Corporate sustainability performance and idiosyncratic risk: A global perspective. The Financial Review, 44(2), 213-37.

Luo, Y. and Bhattacharya, C.B. (2009). The debate over doing: corporate social performance, strategic marketing levers, and firm-idiosyncratic risk. Journal of Marketing, 73, 198-213.

McGrath, T., Nanukuttan, S., Owens, K., Basheer, M., & Keig, P. (2013). Retrofit versus new-build house using life-cycle assessment. Proceedings of the Institution of Civil Engineers-Engineering Sustainability, 166(3), 122-137.

Miller, K. (2020). The triple bottom line: What it is & why it’s important. Harvard Business School. https://online.hbs.edu/blog/post/what-is-the-triple-bottom-line

Newell, G. (2009). Developing a socially responsible property investment index for UK property companies. Journal of Property Investment & Finance, 27(5), 511-21.

Nidumolu, R., Prahalad, C. K., & Rangaswami, M. R. (2009). Why sustainability is now the key driver of innovation. Harvard Business Review, 87(9), 56-64.

Porter, M. E., & Kramer, M. R. (2006). The link between competitive advantage and corporate social responsibility. Harvard Business Review, 84(12), 78-92.

United Nations. (2021a). Sustainable development: The 17 goals. https://sdgs.un.org/goals

United Nations. (2021b). Global alliance for buildings and construction. http://climateinitiativesplatform.org/index.php/Global_Alliance_for_Buildings_and_Construction

Westermann, S., Niblock, S. J., & Kortt, M. A. (2018). A review of corporate social responsibility and real estate investment trust studies: An Australian perspective. Economic Papers: A Journal of Applied Economics and Policy, 37(1), 92-110.

Wilson, G.A. (2020). Economically problematic: An empirical examination of CMHC’s affordability program for existing rental housing stock. https://avenuelivingam.wpenginepowered.com/economically-problematic-an-empirical-examination-of-cmhcs-affordability-program-for-existing-rental-housing-stock/

This commentary and the information contained herein are for educational and informational purposes only and do not constitute an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This article may contain forward-looking statements. Readers should refer to information contained on our website at www.alamstg.wpenginepowered.com for additional information regarding forward-looking statements and certain risks associated with them.

Authors

Grant Alexander Wilson, Ph.D., Assistant Professor, Faculty of Business Administration, University of Regina

Jason Jogia, MBA, M.Fin., Chief Investment Officer, Avenue Living

Author Bios

Dr. Wilson is an Assistant Professor at the Hill and Levene School of Business, University of Regina. His research focuses on marketing, strategy, and innovation. He has published over 20 peer-reviewed articles in top management journals including Journal of Small Business Management, Research-Technology Management, and Journal of Business Strategy. His research has been featured in the National Post and by the World Economic Forum. Dr. Wilson is also a research consultant and contributor to Avenue Living Asset Management.

Mr. Jogia is the Chief Investment Officer at Avenue Living and has over 15 years of experience in real estate capital markets, originating over $10 billion in real estate loans and $1 billion in equity. He has extensive experience in real estate investment analysis and capital structure across various real estate classes. In addition to holding 2 Masters’ degrees in Finance, Mr. Jogia is pursuing his Doctorate of Business Administration and currently serves as an instructor at the University of Calgary, specializing in real estate finance.

INTRODUCTION

One hundred years ago, a gallon of milk was $0.40. Today, that same gallon of milk is close to $4.00 (MasterClass, 2020). This economic phenomenon is called inflation. “Inflation is an economics statistic that tracks the increase in prices of goods and services over a period of time” (Pride et al., 2020). The primary explanations of inflation include demand-pull or cost-push (Lumsden, 2011). Demand-pull inflation occurs when there is an increased need for goods and services creating supply pressures that elicit positive price changes (Lumsden, 2011). In essence, too many dollars are chasing too few goods. Cost-push inflation occurs when wages and cost of raw materials increase, putting upward pressure on prices. Essentially, rising production costs push up prices.

In the past five decades, all of the industrialized economies of the Western world have experienced inflation (Lumsden, 2011). A typical rate of inflation is 2% per annum and an indication of a stable economy (Pride et al., 2020). Over the last 30 years, Canada’s inflation rate has ranged from 0.01% to 5.63%, averaging 2.07% (Statista, 2021) (Figure 1).

COVID-19 & INFLATION

Although inflation in Canada has been historically stable, as Lumsden (2011) aptly acknowledges, it can never be fully anticipated. The COVID-19 pandemic of 2020 has created unprecedented market uncertainty and forced economic anomalies. According to the latest Statistics Canada (2021a) data, the year-over-year inflation rate was 0.7%.

The relationship between inflation and unemployment is fixed and inverse (Phillips, 1958). According to the Phillips Curve (Figure 2), when the natural rate of unemployment is 4.5%, inflation will be stable at 2%. If unemployment is 8%, inflation will approach zero (Phillips, 1958). With Statistics Canada (2020) reporting a current unemployment rate of 8.5%, inflation should theoretically track near-zero in the short-run (Phillips, 1958).

However, some experts are suggesting that inflation is currently underestimated (Carmichael, 2021). Demand for essential goods and services are high, as their prices are tracking above average. Yet, the current “basket of goods” in the consumer price index (CPI), used to assess inflation, includes many non-essential categories as well as those that were reduced as a direct result of COVID-19 (Statistics Canada, 2021a). Accordingly, current measures of assessment may need to be reconsidered to accurately reflect Canada’s inflation.

The much-anticipated end to COIVD-19 and Canada’s stimulus package further point to long-term inflation. As economies emerge from recessions and gross domestic product (GDP) rises, inflation occurs. Historically, Canada’s inflation has followed, but lagged, its GDP increases (Figure 3). Accordingly, post-COVID-19 GDP gains are likely to be an antecedent to inflationary trends.

The unparalleled COVID-19 stimulus package, intended to encourage economic activity, is also likely to create inflationary trends (Janson, 2021). The stimulus package injected, and will continue to inject, cash into the households of Canadians, maintaining degrees of demand and consumer spending normality. As compared to Canada’s 2008 financial stimulus package, its COVID-19 stimulus package was over 420% larger. Measured as a percentage of Canada’s GDP, the 2008 financial crisis stimulus package was 2.8% as compared to the COVID-19 stimulus package of 11.2% (McKinsey, 2020).

 Similar to Canada, stimulus packages from governments across the world have exceeded 300% (McKinsey, 2020). The global stimulus packages have increased government debt and may lead to fiscal dominance. According to Ersel and Özatay (2008), fiscal dominance is by definition the dominance of a country’s fiscal policy over its monetary policy. It is caused by a country’s high debt ratio that severely constrains the effectiveness of its monetary policy (Ersel & Özatay, 2008). In such scenarios, more government spending is required to combat an inflationary shock.

Collectively, the extraordinary stimulus package as well as the expected GDP gains and unemployment reductions following COVID-19 are likely to produce inflation in Canada.

INFLATION DRAWBACKS

Although “the natural tendency of the state is inflation” (Rothbard, 1962), it has its drawbacks. “If prices increase too fast – as they did a few decades ago when inflation jumped to more than 10% a year – your dollars lose purchasing power” (Pride et al., 2020). To this end, Milton Friedman observed that inflation is taxation without legislation.

Lumsden (2011) describes five negative effects of inflation. First, it “impairs the efficiency of the price mechanism and raises costs of buying and selling because money becomes less reliable as a standard of value.” Second, inflation disadvantages individuals on fixed incomes, as it does not adjust in a timely manner. Third, inflation penalizes lenders and favors borrowers. Fourth, “given a system of unindexed taxes, namely one where tax thresholds are specified in money terms rather than real terms, inflation will redistribute resources from the private to public sector.” Finally, a high domestic inflation rate increases imports and decreases exports. To individuals, losing purchasing power as a result of inflation is perhaps the most salient. Anticipating increasing prices, prudent investors explore ways to hedge against inflation.

HEDGE AGAINST INFLATION

An inflation hedge involves investment in an asset that is expected to maintain or appreciate in an inflationary period. Hopefully, its appreciation exceeds, or is at least comparable to, inflation. Real estate has long been considered a hedge against inflation, as rent and property values tend to increase with inflation. Historical empirical evidence supports real estate and farmland as effective inflation hedges (Hartzell, Hekman, & Miles, 1987; Hoesli, 1994; Lee & Lee, 2014; Rubens, Bond, & Webb, 1989).

In order to explore the historical effectiveness of Canada’s real estate and farmland as an investment hedge, inflation was compared to the new housing price index and farmland values from 2000 to 2020. The new house pricing index was selected as a proxy for property appreciation, as it is the most timely indicator of changes to residential real estate values. Farmland values obtained from Farm Credit Canada (2019; 2020) were used to determine its appreciation.

From 2000 to 2020, the cumulative inflation change was 39.0% as compared to a change of 51.8% to the new price housing index (Figure 5). The data showed that the new price housing index significantly outpaced inflation.

From 2000 to 2020, the cumulative farmland value appreciation was 168.4% (Figure 6). The data showed that Canadian farmland outpaced inflation by 129.4%.

In this 20-year period, it is evident that residential real estate and farmland values appreciated faster than inflation, suggesting both were effective hedges against inflation.

To further examine the appreciation after high inflationary periods, above average inflation years were compared to the following year’s change to the new housing price index and farmland value. Any amount exceeding 1.87%, the average inflation rate of the time period, was considered above average. As such, above average inflation was observed in 2000, 2001, 2002, 2003, 2005, 2006, 2007, 2011, 2014, 2018, and 2019 (Statista, 2021).

Every year following an above average inflationary period, the new price housing index appreciated (Figure 7). Changes to the new price housing index ranged from 0.1% to 7.3% for an average of 3.0%, exceeding the mean inflation rates (2.3%) explored.

Similarly, farmland values also increased after above average inflationary periods (Figure 8). Changes to farmland values ranged from 1.4% to 19.5% for an average of 7.8%, exceeding the mean inflation rates (2.3%) explored.

Based on the 20-year comparison of cumulative inflation to residential real estate and farmland value appreciations (Figure 5 & 6) and high inflation years as compared to the immediate year’s residential real estate and farmland value appreciations (Figure 7 & 8), it was evident that both acted as an inflation hedge. Although inflation, let alone investments, can never be fully anticipated, the best known predictor of the future is the past.

CONCLUSION

The macroeconomics trends, including the stimulus package, expected GDP gains, and anticipated reduction in unemployment, indicate impending inflation in Canada. In this extraordinarily uncertain time, prudent investors seek to protect the value of their money. Previously, Canadian residential real estate and farmland have proved to be strategic inflation hedges. If history repeats, Mark Twain’s famous quote to “invest in land, as they’re not making it anymore” will all the more ring true.

REFERENCES

Carmichael, K. (2021). Low inflation skeptics are right, just not as high as they think they are. Financial Post. https://financialpost.com/news/economy/low-inflation-skeptics-are-right-just-not-as-right-as-they-think-they-are

Ersel, H., & Özatay, F. (2008). Fiscal dominance and inflation targeting: Lessons from Turkey. Emerging Markets Finance and Trade, 44(6), 38-51.

Farm Credit Canada. (2019). 1985-2018 historic FCC farmland values report. https://www.fcc-fac.ca/fcc/about-fcc/reports/2018-farmland-values-historic-report-e.pdf

Farm Credit Canada. (2020). 2019 farmland values report. https://www.fcc-fac.ca/fcc/resources/2019-farmland-values-report-e.pdf

Hartzell, D., Hekman, J. S., & Miles, M. E. (1987). Real estate returns and inflation. Real Estate Economics, 15(1), 617-637.

Hoesli, M. (1994). Real estate as a hedge against inflation: Learning from the Swiss case. Journal of Property Valuation and Investment, 12(3), 51-59

Janson, R. A. (2021). How inflation caused by pandemic stimulus may come back to bite the middle class. https://financialpost.com/investing/investing-pro/how-inflation-caused-by-pandemic-stimulus-may-come-back-to-bite-the-middle-class

Lee, C. L., & Lee, M. L. (2014). Do European real estate stocks hedge inflation? Evidence from developed and emerging markets. International Journal of Strategic Property Management, 18(2), 178-197.

Lumsden, K. G. (2011). Economics. Edinburgh Business School Heriot-Watt University.

Macrotrends. (2021). Canada GDP growth rate 1961-2021. https://www.macrotrends.net/countries/CAN/canada/gdp-growth-rate

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McConnell, C. R., Brue, S. L., and Barbiero, T. P. (2007). Microeconomics. McGraw-Hill Ryerson.

McKinsey & Company. (2020). Total stimulus for the COVID-19 crisis already triple that for the entire 2008–09 recession. https://www.mckinsey.com/featured-insights/coronavirus-leading-through-the-crisis/charting-the-path-to-the-next-normal/total-stimulus-for-the-covid-19-crisis-already-triple-that-for-the-entire-2008-09-recession#

Phillips, A. W. (1958). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957. Economica, 25(100), 283-299.

Pride, W. H., Hughes, R. J., Kapoor, J. R., Althouse, N. R., and Allan, L. A. (2020). Business. Nelson.

Rothbard, M. N. (1962). The Case for a 100 Percent Gold Dollar. Libertarian Review Press. 94-136.

Rubens, J., Bond, M., & Webb, J. (1989). The inflation-hedging effectiveness of real estate. Journal of Real Estate Research, 4(2), 45-55.

Statista. (2021). Canada: Inflation rate from 1985 to 2025. https://www.statista.com/statistics/271247/inflation-rate-in-canada/

Statistics Canada. (2020). Labour force survey, November 2020. https://www150.statcan.gc.ca/n1/daily-quotidien/201204/dq201204a-eng.htm

Statistics Canada. (2021a). Latest snapshot of the CPI, December 2020. https://www150.statcan.gc.ca/n1/pub/71-607-x/2018016/cpi-ipc-eng.htm

Statistics Canada. (2021b). New housing price index, monthly. https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810020501&pickMembers%5B0%5D=1.1&cubeTimeFrame.startMonth=12&cubeTimeFrame.startYear=1989&cubeTimeFrame.endMonth=12&cubeTimeFrame.endYear=2020&referencePeriods=19891201%2C20201201

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