Hope for the Best, Prepare for the Worst: What COVID-19 Means for Canadian Investors
With over 1430 confirmed cases of COVID-19 in Canada*, including 20 deaths, apprehension for the future is natural and expected. These are unprecedented times and the impact of the coronavirus on the Canadian economy and real estate is ever-changing and evolving. The COVID-19 pandemic is one of the greatest market influencers of our time. And yes, the virus will cause a significant dent on the country’s GDP–even greater than initially anticipated.
And while there is cause for concern, now is the time for compassion, cool reasoning, and calm operations. There is much confusion and uncertainty about the virus and the inundating reports and updates being released daily, if not hourly. The Real Estate Investment Network (REIN) is committed to weeding through the news, studies, and hype to provide you relevant, timely, and credible information. It therefore becomes clear that our job as investors is to look past the confusion and seek clarity based on concrete evidence. After all, any sound investment decision is based on facts, not emotions.
Some Good News
Looking at the numbers, the future may not look that bright, but there is hope. Take for instance the fact that China has closed down its last temporary coronavirus hospital because there weren’t enough new cases to support its operations. Apple just reopened all of its 42 stores across China, and the number of new cases in South Korea is on a steady decline. To top it off, a vaccine against coronavirus is in the making, which could possibly be ready for mass distribution within a year’s time. There are already a number of existing medicines which may be used to treat patients infected with the virus.
Earlier economic forecasts originally saw the impact of the coronavirus as ‘modest and temporary’ at worst. With more stringent containment measures in place, and oil price shocks are being felt, the impact may be greater and last longer than initially anticipated. Stalled exports to affected countries are set to negatively affect the country’s quarterly growth. The oil industry is on a downturn as prices drop to USD 20/bbl.
According to experts, the oil price shock, coupled with supply disruptions, will tip the Canadian economy into recession this year. In fact, a recent ScotiaBank report* reveals a recession has become ‘unavoidable’ at this point. According to the report:
“Despite remarkably timely and aggressive responses by global central banks and some fiscal authorities, recessions appear unavoidable in a number of countries. Global growth is expected to average 1.3% in 2020, the lowest level since the decline in global GDP recorded in 2009. In Canada, that decline is expected to be closer to 11% (QAAR) as more aggressive containment measures are deployed and the decline in oil prices begins to be felt. For the year, GDP is expected to fall by 2.2% and 0.8% in Canada and the US, respectively.“
Nevertheless, the same report suggests that the economy is bound for a sharp recovery once the virus is contained, stimulus kicks in, and pent-up market demand boosts the economy upward once again.
*as of March 22, 2020
*as of March 20, 2020
Canada’s Economic Response Plan:
1. Stimulus Package Overview
As a means to curb the impact, the federal government is injecting $82 billion worth of stimulus, equivalent to three per cent of Canadian GDP. The massive aid package is composed of $27 billion as direct support for Canadians while a large amount is dedicated to support the finance industry through a $55 billion tax deferral fund.
Canada’s Economic Response plan is robust and, while still being finalized, can be found here: https://www.canada.ca/en/department-finance/news/2020/03/canadas-covid-19-economic-response-plan-support-for-canadians-and-businesses.html
Here’s a brief summary of a few key measures:
A six-month moratorium on student loans is also in the works which spells good news for student rental housing providers.
While many details still need to be worked out to fully understand this stimulus package, the federal government has made it clear that these benefits will go through existing financing infrastructure such as the EI and the CCB. It’s also important to note that these benefits will course through Canadian pockets by April 2020 retroactive from March 15.
Several expanded loan packages are also available for businesses and investors seeking to bridge their operational costs through these trying times, both from the Development Bank of Canada (DBC) and the big-six banks: RBC, National Bank, CIBC, TD, BMO and ScotiaBank.
2. Business Development Canada – Support Measures
In addition to the resources above, the Business Development Bank of Canada is offering the following support measures:
- Small Business Loan
- Low-interest loans up to $100,000 with postponed capital payment for 6 months and pay up to 6 years
- Online application: https://www.bdc.ca/en/online_financing/pages/loan-application.aspx
- Working Capital Loan
- Extra funds to bridge cash flow gaps and support everyday operations
- Online application: https://www.bdc.ca/en/financing/business-loans/working-capital-financing/pages/working-capital-financing-form.aspx
- Purchase Order Financing
- Additional funds to pay suppliers
- Online application: https://www.bdc.ca/en/financing/business-loans/pages/purchase-order-financing-form.aspx
3. Monetary Policy: Impacts on real estate
In current conditions, the economic implications of COVID-19 will be driven by a decline in land and international travel, including tourism, along with the unprecedented oil price shock and disruptions to industry supply chains. The implications of policies, changes, and impacts are numerous.
REIN will advise with more information on immediate impacts as they become available. We are watching policies unfold, day by day, that may impact operations, revenues, and costs, such as Ontario’s announcement on March 17 to halt new evictions and postpone scheduled enforcement of eviction orders currently set for this week to COVID-19.
Typically, based on REIN’s Long-Term Real Estate Success Formula and, in this case, its opposite, REIN’s Economic Turmoil Formula, a decline in GDP growth will impair the rental and property markets in 18 – 24 months. However, this is a unique situation, and the velocity of the changing situation and responses could compress outcomes and timeframes rapidly.
Demand for Canadian real estate will likely have a positive lift resulting from increased demand, rental shortages, demographics, immigration policies, and Canada’s position as a relatively safe harbour for capital, including foreign.
While there are current travel restrictions in place, existing immigration policies have not yet been altered. The Canadian Federal government supports a continued upsurge in immigrant populations in the next few years. Once the outbreak is contained, and the dust settles, we can postulate an increase in demand for migration to Canada, particularly from China and other Asian countries. This could then increase demand for both rentals and properties, providing a further lift to real estate markets down the road.
Post-coronavirus Canada could also mean a haven for foreign capital. All things being equal, it’s possible that post-coronavirus foreign capital becomes increasingly directed to international property investments, further boosting rental and property markets in the process.
What Investors Should Be Mindful of Moving Forward
Historically speaking, real estate tends to be a very stable asset class even in times of turbulence. While current market conditions are not conducive for purchasing properties, it is best for real estate investors to use this time to position themselves in a place where they are best suited to weather rougher times ahead.
As a Canadian real estate investor, here’s how you can prepare:
- Stay tuned for updates on the confusing and rapidly evolving scenario by trusted sources
- Ensure a positive cash flow
- Refinance where possible
- Improve property management practices
- Stay calm, well-informed, and alert
Ultimately, the best way for real estate investors to prepare is to raise capital and build strategic partnerships (REIN’s Success Formula for Raising Capital and Strategic Partnerships), both of which will help weather the storm. When opportunities become available, and the time is right for acquisitions, investors will have a solid foundation from which to build.
What We Need Now
Lastly, it is imperative to stress that investors and property owners alike need to be compassionate in these trying times. Many, if not everyone, will be afflicted by financial hardships. Helping those in need speaks volumes to those on the receiving end, but also to the community as a whole. A simple offer to delivering food and medicine to the elderly, or sending a letter just to check-in to see how your tenants are doing, will go a long way. Whatever it is, the main thing is that we care for others, especially now when we need it the most.
As a network of investors dedicated to caring for the welfare of its members, it is crucial to recognize that the only way to get through this crisis is to come together as a community, and REIN is here for you.
More places to connect with us:
Check out upcoming REIN events