Canadian real estate, just like other industry sectors around the world, experiences capital rotation and market cycles. While hot topic industries such as artificial intelligence (AI) are experiencing a peak in their respective market cycle, our real estate market has been mired in a multi-year slump that began in 2022.
Globally, many markets are also experiencing turbulence. After periods of increasing globalization brought higher profits from increased efficiency, we are now in a period of protectionism and tariffs. The full impact of this shift is still coming to bear, but it is clearly a negative impact overall.
Equity Markets Review
Today, the Magnificent Seven (Amazon, Meta, Alphabet, Netflix, Microsoft, Apple, Nvidia) account for 35% of the S&P 500 in the U.S (see Figure 1). This dominance continues to grow, masking deeper issues in the economy. For example, excluding these seven companies would have dropped the S&P 500’s year-to-date returns (YTD) from 16% to only about 7%. This dichotomy is further emphasized by the underperformance of many household name brands with wide competitive moats such as Adobe, Salesforce, UPS, and Clorox are down between 24% to 31% YTD.
Figure 1. Growing Concentration Risk in the Market
Source: The Motley Fool
Note: Performance at December 1, 2025.
Concentration risk within equity markets is not a U.S.-specific phenomenon. The top 10 holdings for the S&P/TSX Composite Index sat at 37.4% of the index, at October 31, 2025, with the largest holding Shopify (TSE: SHOP) at 6.9% of the index. This was comparable to the S&P 500: the top 10 holdings represented 39.5% of the index, with the largest holding Nvidia (NASDAQ: NVDA) at 8.1% of the index, at the same date. Further, both indices are plagued by industry-specific risk, with the top nine companies by market capitalization in the S&P 500 operating as technology-focused companies and seven of the top 10 companies by market capitalization in the TSX focused on banking or financial services. Such a large concentration defies the popular retail investor mantra of blindly investing in exchange traded funds (ETFs) for broad market exposure and reduced volatility.
Investing in individual stocks offers its own set of risks. As shown in Figure 2, forecasting strong relative performance for any individual company across short- or longer-time horizons is a difficult task. Only three of the top 20 S&P 500 stocks have remained consistent over the past 25 years and each of the three operates in a different industry. This company-specific risk further highlights the risk involved in investing so heavily in the tech-focused Magnificent Seven. For the TSX, this ratio is only slightly better with seven of the top 20 remaining consistent and only four operating in the same industry (CIBC, Scotiabank, RBC, and Manulife).
Figure 2. Top 20 S&P 500 Stocks
Note: Performance at October 31, 2025.
Real estate has, like the other non-AI industries, taken a back seat in this current market. The U.S. market is experiencing the beginnings of a market downturn, while the Canadian market has been impacted since 2022. However, for several reasons, the Canadian real estate market is at a more resilient part of its market cycle than the U.S.’
Most importantly, current peak-adjusted market pricing for Canadian real estate is now among the lowest since the Ontario 1990s market crash (Figure 3). While this is welcome relief for existing real estate holders as general market risk subsides, new investors could be buying into a stagnant market still seven to ten years from recovering to 2022 prices based on Vancouver 1995 and Ontario 1990s historical data. A slower recovery could result in a muted return of less than 2% per annum.
Figure 3. Current vs Historical Canadian Real Estate Downturns
Source: BMO Economics, Gentai
Credit Markets Review
Similar to the equity markets, global credit markets have also undergone a period of stronger returns but also increasing risk levels. Rising and falling rates amidst a backdrop of economic uncertainty have resulted in a period where only the best at underwriting credit risk have been able to survive, let alone thrive. Further complicating rate forecasts are the differing rate policies issues from various national financial institutions (see Figure 4). During these uncertain times, manager skill has never been so important.
Figure 4. Increasing difference in U.S. and Canadian Interest Rates
Source: Bank of Canada, Bloomberg Finance
Within the corporate lending space, lenders not only face increased competition, having received record investor inflows in recent years, but also creditor-on-creditor violence in cases like liability management exercises (LMEs). LMEs are part of a growing trend in the U.S. and in Europe to manipulate defaults, manifesting from weak credit covenants (e.g., the contractual rules and limits by which the borrower must operate within), elevated debt costs, impending maturities, and rising distress rates.
Increased competition had resulted in 90% of senior corporate loans being issued with no meaningful covenants (“covenant-lite” or “cov-lite”). Documentation standards began declining during the ultra-low-interest rate period as investors reduced requirements to improve yield. As a result, borrowers are now starting to exploit these terms to borrow more money at the expense of a subset of existing lenders. As an alternative to default, LME has been increasingly popular, but it adds significant risk to any corporate lender, whether senior or junior in priority.
Figure 5. LME Example
Source: Oaktree
While this exact risk is not quite applicable in the Canadian real estate market, given how mortgages are processed in Canada, the core issue of weak documentation and covenants is widespread and introduces significant risk to other MIEs who have been forgoing such protections to chase yield. Here at Gentai, we have a strict covenant package and will never compromise on risk.
Mortgage Market Review
Not surprisingly, the real estate mortgage market has not been fully insulated from the market turbulence, and, like other credit markets, manager quality has been most indicative of fund performance.
For example, we are now seeing stressed and distressed rates increase across the board for other mortgage investment entities (MIE or MIC), which have then caused liquidity issues and redemption limits. Per the Canadian Mortgage and Housing Corporation (CMHC), average Stage 3 impairment rates for single family home loans from the top 25 MIEs or alternative lenders doubled from 2023 to 2024, as of September 30, 2025. Single family home foreclosures similarly doubled from 2023 to 2025. CMHC expects mortgage delinquency rates to continue increasing in 2025. This is an important statistic to gauge the health of portfolios in the market, as single family homes are considered one of the least volatile real estate asset types.
Increased asset-level risk has had an outsized impact on fund performance as well, because interest rates have also declined due to market headwinds. Per the CMHC, single-family average lending rates peaked in 2024 at 10.5%, and have now fallen to 9.8%, approaching a double-digit percentage decline. The scale of this drop is partially masked by the prevalence of floating rate loans with rate floors in recent years.
As mentioned previously, manager selection is increasingly important during this period, as we here at Gentai have actually experienced a decline in default rates during this period and our average interest rates have exceeded that of the market. Our outstanding performance, coupled with rate floors on all of our floating rate loans, have allowed us to continue to provide consistent returns in spite of lower interest rates. This consistency in performance has helped our investors earn passive income in Canada.
Figure 6. Gentai’s Consistent Performance Across Rate Markets
Source: Bank of Canada, Gentai
Importantly, we have optimism for the immediate future, despite the falling rate environment. Should the real estate market continue its relatively stagnant performance, our substantial loan-to-value (LTV) protection will continue to provide downside risk protection, while generating positive returns higher than holding real estate equity. We expect to continue providing stability in your portfolio as an anchor through market turbulence.
Gentai’s Portfolio and Outlook
At Gentai Capital, we have consistently taken the most conservative and credit-sound approach possible to navigate market turbulence over our 13-year history. We do not use covenant-lite deal structures and include a variety of measures to ensure that our collateral package is sound, and our investors’ principal remains intact and whole.
In general, we take a very conservative approach to underwriting that focuses on borrower profiles, collateral quality, and attractiveness and likelihood of exit path. This is a key step that ensures we are lending to strong borrowers with assets and liquidity to support our obligations. Post-investment, our seasoned operations team works closely with our borrowers and has the experience to management projects and/or properties through varied economic scenarios and market cycles. Throughout this process, we are well-protected from principal loss because of our conservative LTV and tight covenant package.
As mentioned earlier, most of our portfolio (59% across all three mortgage funds) is invested in British Columbia, where tariff impacts are more muted. The completion on a $18 billion liquid natural gas facility in Kitimat, British Columbia, will also diversify energy exports into Asian markets, benefiting the province. Our exposure to Alberta is primarily based on affordability, rather than exposure to oil and gas. However, we could also stand to benefit should the five of Canada’s six largest banks that withdrew from the Net-Zero Banking Alliance in January decide to re-enter energy markets and reduce the oil and gas industry’s cost of capital. In Ontario, we are hyper-focused on desirable areas where the demographics support home values regardless of market conditions. We do not have meaningful exposure to condos in Ontario. Overall, we have generally avoided industry-heavy geographies, which we view as more exposed to economic volatility.
Our commercial portfolio is already positioned well within multifamily housing, where we believe tariff impacts will be most muted and market conditions are most stable. At September 30, 2025, 77% of Gentai Commercial Mortgage Fund was in such multifamily properties.
Our investment philosophy revolves around short-term bridge loans spanning 1-2 years. As a result, our current loan book also has an overall average term-to-maturity of just seven months. This ability to turn over loans quickly gives us additional flexibility to tweak our underwriting based on actual current events.
As for any credit manager, defaults and workouts are unavoidable, but our experienced workout team has demonstrated their ability to resolve issues within the loan portfolio to a beneficial and positive outcome for our investors, highlighted by our since-inception loss rate meaningfully below 1%, at September 30, 2025.
Going forward, we do plan to target investments with lower risk in the near term to compensate for market uncertainty. However, we do not view current market conditions as a particularly large threat to our investment process, nor do we believe it will impact our returns going forward based on our unique investment strategy. As usual, we expect to deliver the same, consistent and attractive distributions to our investors.
For more information on Gentai’s products, including how to invest through an RRSP or TSFA account, please contact [email protected].
