The Power of the REIT

Housing over the past few years has become a sore subject for most Canadians. The issue seems to be terminal, growing month after month, and our rising population isn’t going to wait around.  Are Killam and other real estate investment trusts (REITs) the solution for a better future? The short answer is no, but they do have some potential to help move things in the right direction.

Similar to their apartment buildings, Killam REIT’s growth has been headed to the sky. According to an October Saltwire article by Don Mills, Killam originally was incorporated in 2000, then became a real estate investment trust in 2016 after over a decade of success. Now, they hold the title of 3^rd largest REIT in the apartment market in Canada. 

The housing crisis encompasses a variety of intricate issues caused by economic imbalances, a lack of social funding and inflation. Let’s simply focus on straightforward and short-term solutions, such as increasing the supply of housing.

Many Canadians start to worry when big industries, such as housing, become an oligopoly. When the industry becomes inhabited by large players, smaller real estate firms and landlords are outpaced and competition thins out.

Turning to big firms isn’t risk-free

In this scenario, a lack of competition in the real estate market erases competitive pricing for rental units, and the power of the consumer becomes non-existent. In an even worse scenario, a housing cartel could form, wouldn’t that be fun? The idea of large companies discretely taking over an industry has recently become a point of concern with two major international corporations, Google and Amazon. 

They face lawsuits from the Justice Department and Federal Trade Commission, respectively, for running potential monopolies. 

In Canada, there has been some skepticism about how truly mixed our economy is. Canada has recently been dealing with an almost complete monopolization of our telecommunication services; Rogers, Bell and Telus controlled over 89% of the wireless market in 2021.

A similar principle has been visible in the recent fiasco with the top grocery brands creating a cartel-esque system in which they inflate food prices to a point where the government had to step in and hold them accountable. Very reassuring, I know. 

In Nova Scotia’s housing market, price ceilings which prevent landlords from raising the rental price above a certain point already exist. Of course, some argue price ceilings aren’t the most effective way to manage soaring housing costs, especially at current levels.

But big firms could be just what we need right now

Rather than entering that dystopia, REITs could actually be a potential aid to resolving housing worries. Big trusts, such as Killam, have spread out risk and hold the capacity for large investments.

The provincial government has committed to dropping their portion of the HST charged on the construction of new housing units, subsidizing contractors and allowing for cheaper building expenses. Unfortunately, the cost of building one unit is approaching $500,000 and the creation of just 200,000 units is expected to cost around $100 billion. 

Canada is calling for 3-5 million housing units in the next decade, with costs expected to be within the trillions. 

One of the more feasible ways to make this a possibility is through large firms, such as Killam, who can afford to take on mass projects. Now is a smart time to aid such firms, as Canada’s population recently hit 40 million.

In 2022, the population grew 2.7 per cent, and this year has gone up 2.9 per cent, marking the fastest population growth in Canada since the Baby Boom in 1957. Canada is now considered one of the fastest-growing populations in the G7. 

One can only predict the incoming surge of government grants and subsidies to the industry. With apartments being the target of recent federal subsidies, Killam and other REITs could be coasting off government contracts in the near future.  

REITs are sustainable

Another perk of large REITs, like Killam, is that they are able to hold out against inflation and increased operating costs. As rental prices hike around the country to an average of $2000, Killam’s REIT is able to hold strong with 75 per cent of their apartments renting for less than $1,500.

Over the past 20 years, operating costs in the industry have gone from $2000 to $7000, with realty tax being the leading cause. 

Large trusts with larger revenues are able to spread out large blows like this, rather than spiking renting prices, fluctuating as the markets do. This makes it more feasible to take part in large housing unit construction, past units can pave (no pun intended) and fund the way for the new. 

Large trusts also have more capacity to meet calls for corporate social responsibility. Killam has recently been involved in the green movement that has been taking hold all around the world. Moving more to solar power and green energy to power their apartments, they plan to self-generate 10 per cent of their energy needs by 2025.

Trusts like Killam could not only bring some relief to the housing crisis but could also do so in a more efficient and green manner that small realty investment companies can’t afford.

If Killam and similar REITs prove to be an effective short-term solution to managing this affordability crisis, REITs all over the country could see themselves becoming very popular investments for government officials trying to solve the housing problem. Currently, there is $1.81 in mortgages owed for every $1.00 of disposable income. These levels are similar to the levels directly before the 2008 housing crisis. 

There is no doubt a massive problem facing the Canadian economy and the future of quality of life for Canadians. The solution is bound to be complex, but REITs like Killam could be a part of it. Innovation is often created to solve a problem, and with a systemic problem as big as this, the solution, be it REITs or some other creation, better prove just as grand.