BMO called Canada a nation of rentals this month. The Bank of Canada, in the same week, flagged a glut of tiny condos and cut its residential investment forecast. Two of the country's most credible institutions saying the same thing from two different sides. Today, what it means and why FCPRET is built for exactly this reality.
PV, Mit & Jeff
The largest bank research desk and the country's central bank now agree on the direction. What happens to a rental portfolio when the entire market finally catches up to the trade the private operator ran ten years ago.
Yesterday's Monday letter argued that the current environment is the best window in a decade to buy Southern Ontario apartment buildings. Today's letter is why the underlying asset itself, the Canadian rental building, is now in a structurally different position than it was five years ago. The macro tape has quietly rewritten the pitch on this asset class.
Two data points from the last five days.
BMO Capital Markets published a research note on Canadian housing starts. Volumes slowed. The composition, however, did something more meaningful. The share of new housing being built as purpose built rental has continued to climb, to the point that BMO's economists have started calling Canada a nation of rentals. Not a country building a mix of ownership and rental. A country whose new supply is now predominantly rental.
That is a structural shift. When the largest bank in the country describes the composition of Canadian housing this way, it stops being a fringe operator thesis and starts being the base case.
The Bank of Canada released its Monetary Policy Report the day before. Buried in it, a warning: there is now a meaningful glut of tiny condos in the Canadian market. Overbuild, sitting inventory, and mismatched pricing between what investors paid and what the units actually rent for. The Bank slashed its residential investment forecast on the back of it.
Read the two signals together and the message is one thing. New ownership supply has overshot. New rental supply is where the actual demand is landing. And the country is running out of the second while it stares at a warehouse of the first.
A cyclical shift ends when the cycle turns. A structural shift is a permanent change in the underlying customer's behaviour. This one is structural, for three reasons.
One. Affordability. RBC's own housing affordability index still puts Canadian affordability at 1990s bubble levels, even after the correction. A generation of Canadians is being locked out of ownership at these price to income ratios. That is not a wave that reverses in twelve months. That cohort rents, not by preference, but by math.
Two. Household composition. Household sizes have dropped. Single adults, single parents, seniors, and childless couples now outnumber the traditional family unit that most of the older housing stock was designed for. That shift favours smaller purpose built rental units over ownership focused three bedrooms.
Three. Interest rates. Even if rates soften, the qualifying ratio damage of the last three years is compounding. Every year fewer new households pass a mortgage stress test at anything close to today's prices. Rental fills that gap by definition.
Those three drivers do not reverse. They compound. Which is why a nation of rentals is not a headline. It is the base case for the next decade.
Institutional capital is starting to move accordingly. Public pension funds. Insurance companies. Multi family focused REITs. Canadian and foreign institutional investors are all increasing their target allocations to Canadian rental. That capital is chasing the same buildings we buy, in the same cities, at the same rent bands.
When institutional demand meets a structurally undersupplied asset, the direction of cap rates is not ambiguous. Cap rates compress. Values rise. And the operator who acquired at the wider going in yield gets to keep both the compressed cap on exit and the operating NOI they forced through the middle.
That is the shape of the trade FCPRET has been positioned for since inception. Buy the Southern Ontario apartment building at a reasonable going in yield today, force NOI higher through re densification and adaptive reuse, and sit in the compression that comes as the rest of the institutional world finally starts pricing the asset the way BMO now describes it.
Institutional capital is patient, but slow. Its own compliance processes and underwriting cycles mean that by the time a pension fund files a formal target allocation to Canadian rental, the private operator on the ground has been buying for years. That is the arbitrage in a nutshell. The private REIT gets to buy while the trade is still contrarian, and gets to enjoy the compression when the institutional consensus arrives.
FCPRET has been buying the exact building type the institutions are now targeting, in the exact rent bands they are now underwriting, in the exact Southern Ontario cities they are now paying analysts to study, for the last decade. This is not a fund catching up to the moment. This is the fund that was already there when the moment arrived.
On the FCPRET side, everything that is happening in the macro tape works in favour of the existing unit holder. Cap rate compression on rental buildings translates directly into upward pressure on the trust's unit price. Rising institutional target allocations to Canadian rental raise the ceiling on future exit valuations. And every unit the trust buys in the current window is a unit acquired at the wider going in yield the macro tape is now closing.
On the development side, the shape of Foundation Development Fund III continues to firm. Wellington's resubmission goes in this week. Public comments window with City of London stays open until August 31. If you are accredited and want to be at the table before Fund III takes shape, this is the week to signal it.
$10K Minimum · RRSP / TFSA / RESP / LIRA Eligible · Also Cash
Targeted: 15% Annualized (7% cash monthly + 8% appreciation)
Our Apartment Building REIT across Southern Ontario. Open to new subscribers this month, on the front side of the acquisition pipeline.
Public comments open until August 31.
Roughly 1,004 Units Across Two Towers · London, ON, On The Wellington Gateway BRT
Tranche 1 closed. Accredited investors interested in Development Fund III should signal now.
Talk soon,
PV, Mit & Jeff
P.S. If you want to be on the buying side of the nation of rentals repricing, subscribe to FCPRET here. $10K minimum, monthly cash distribution, registered account eligible.
