Upgraded building infrastructure slashes maintenance fees

Empty nesters transitioning to vertical living often make the mistake of moving into older condominium buildings because the units are bigger and, on a dollar per square foot basis, they’re priced competitively.

“People can get 1,500 sq ft not realizing they may be buying into a potential problem now or in the future,” said Sunny Sharma, broker and co-owner of Leading Edge VIP Realty. “We shy away from older buildings, and while they usually have larger units, which tend to be attractive for people transitioning from a house, they’re gravitating to older buildings not realizing a lot of problems will come their way shortly thereafter. They can do their due diligence, and that can help identify upcoming repairs, but what if it’s a major one?”

Maintenance fees rise for reasons ranging from property taxes to a condominium’s location, but older building infrastructure is also a major contributor to escalating costs. Although that problem can be rectified, the price tag is astronomical.

“To upgrade a 200,000 sq ft building, it costs about $1 million,” said Chandra Ramadurai, co-founder of Efficiency Capital. “To save $20,000 a month you may have to invest $1 million up front to optimize the equipment, which most buildings owners don’t want to do.”

There’s no shortage of the capital required for these upgrades, but Ramadurai noted that it is usually allocated toward constructing brand new buildings rather than upgrading boilers.

“Social housing is seriously underfunded as well, so it’s more allocation of capital than availability,” he said. “It’s not that upgrades are inherently risky; the problem with efficiency is you’re saving on something compared to what you did last year, and when you can’t measure something, you don’t know how much you’re making. So baselining is important, but it’s not easy because the baseline mechanism isn’t available.

“Capacity is also a problem—most managers struggle to keep up with their day-to-day activities, so targeting reductions doesn’t happen much because they’re trying to keep their heads above water.”

The way Ramadurai sees it, closing the fissure between capacity and technological availability is the missing piece of the puzzle. However, that was before the COVID-19 pandemic upended the world and redirected reserve funds towards unplanned costs.

Efficiency Capital replaces outdated building infrastructure for a lower upfront cost, subsequently receiving monthly instalment payments while retaining ownership of, and operating responsibilities for, the technology. In replacing the technology, for which Efficiency Capital provides building officers maintenance training, Ramadurai says reserve funds are no longer needed. And given that the company has done 55 buildings in the last 18 months, there’s clearly a need in the market.

“The building gets new equipment at a reduced cost because instead of paying $1 million, they pay $20,000 upfront and $10,000 a month, and in 10 years we give them the equipment and they get the savings,” he said. “We’re not lenders; we own and operate the equipment. We’re equity investors who don’t own the building, we own the equipment in the building.

“Because we replace the equipment, you no longer need the reserve funds, which means the $1,000 in maintenance fees goes down depending on how underfunded the building is. A condo with adequate reserves will have reductions that are even higher because they don’t need to collect these reserves for the next 10 to 15 years, so there’s a 10-20% reduction on energy costs and another 10-20% on reserves, which means 20-40% is being saved.”

In addition to benefiting condo unit owners, the entire building’s value increases too, added Ramadurai.

“Typically, cash flows are counted into value, and by reducing the cost we increase the cash flow, which means that, at the same cap rate, you end up having higher value of the building.”

2021-02-26 14:49:50

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Despite pandemic, Canadians spending extravagantly on homes

Purchasers are spending money on more expensive homes in Canada’s biggest cities and it’s trickling down the ladder, making housing more prohibitive for the people most affected by the pandemic.

“Existing home sales have shifted towards more expensive housing types in Vancouver, Toronto, Ottawa and Montreal and away from generally less expensive apartment condominiums and attached dwelling,” said a new report from the Canada Mortgage and Housing Corporation. “These markets have also seen a shift in the distribution of sales towards higher price ranges.

“This shift likely reflects the uneven distribution of the economic impacts of the pandemic, with higher-income households able to maintain their income through adapting to work from home. In contrast, those employed in lower-paid industries were less able to adapt to pandemic conditions so that, in combination with a sharp decline in new migrants to Canada, relative demand for less expensive housing types fell.”

To be clear, demand from immigrants and lower wage earners for less expensive housing has greatly diminished, but relatively well-heeled Canadians priced out of the single-family market are climbing down the housing ladder and buying whatever they can afford. According to Robert Mogensen, a mortgage broker, their ranks are swelling.

“If they had their sights set on a single-family home, with the way pricing has gone on more modest ones, they’re being pushed down into townhouses and condominiums,” said Mogensen of The Mortgage Advantage. “I’ve had a number of clients you’d assume would have no trouble, like dentists, doctors and lawyers, who’d be looking specifically for single-family homes, not qualify. Maybe because they were getting started in their professions, but they’d have to start looking at townhomes, which are typically for middle-of-the-road income earners, and now it’s driving the price of townhomes up.”

Mogensen says the fierce competition at the higher end of the housing market—where he’s seeing multiple offers on almost everything, as well as “crazy offers with no conditions”—is trickling as far down as the condominium market.

“Buying activity for higher-end homes has picked up from where it was a year ago, and now it’s working its way right down the scale. The condo market is starting to heat up as well for exactly the same reason the townhouse market is.”

At the same time, the economic impact of the pandemic is disproportionately affecting younger Canadians and lower-income households, who are watching the cost of housing soar to new heights from the sidelines.

“Despite increased government transfers to these households, their exposure to negative employment effects meant they were less likely to purchase a home during the pandemic than other households,” said the CMHC report.

2021-02-26 14:58:07

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Low interest rates, favourable exchange turn U.S. into hotspot

Savvy Canadian real estate investors have, for years now, known about real estate hotspots south of the border, and with the pandemic catalyzing interest rate cuts courtesy of both the Bank of Canada and the Federal Reserve, there’s arguably never been a better time to invest in the United States.

“Over the last two months, we’ve seen record-high requests for mortgage preapprovals from Canadians looking to buy real estate here in the U.S.,” said Alain Forget, RBC Bank’s director of business development. “A lot of Canadians are COVID- and winter-fatigued and they are getting ready to make a move, and of course the U.S. market in a state like Florida has a lot to offer.”

In fact, between March 2019 and March 2020, Canadians invested $9.5 billion in the American real estate, $4.75 billion of which was in Florida. RBC recently hosted a briefing outlook on the economy and determined that the Canadian dollar should remain at about $0.78-0.80 until mid-2021, at which time the U.S. dollar will return closer to $0.76.

“The currency exchange is one of the best at around $0.78-0.80, which is close to a 25% exchange and one of the best rates in the last three years,” said Forget. “When you factor those together, it’s another opportunity for Canadians to contemplate the U.S. market from an investment standpoint.”

The first step, however, is getting preapproved—RBC helps Canadians do it online within two or three days, and the letter is valid for 120 days

RBC helps Canadian investors plan out their investments. From helping them determine their monthly payments to coming up with a financial plan—as well as putting them in touch with experienced realtors and cross-border legal and tax experts—the bank saw a marked increase last month in interest from Canadians.

Unlike in Canada, where the Office of the Superintendent of Financial Institutions introduced a 200 basis point stress test called B-20, no such thing exists in the U.S. According to the National Association of Realtors, Canadians primarily purchase single-family homes, followed by condominiums, in the U.S. Florida, for example, is often chosen for its turnkey properties, Forget says, and it’s replete with popular investor markets, as are Arizona and California.

“The beauty of the Florida market is it offers everything at relatively affordable price points,” said Forget. “If your budget is starting at $200,000, there are a lot of inland options, and for oceanview condos you should expect to pay over $500,000.”

Florida is already a popular destination for east coast Americans who, because of COVID-19, are escaping large metropolises like New York. Forget says Canadians have expressed similar intentions.

For their part, Western Canadians have grown fond of Arizona and California, the former in particular for its affordability and robust market fundamentals. However, even for investors in Central Canada, where the metropolises offer diminishing return on investments, the United States offers densely-populated markets with strong fundamentals and no shortage of rental demand.

“Florida has a lot of different markets that still offer great returns, and even with prices rising slightly, they’re far more affordable than the GTA, Vancouver and Montreal,” said Forget. “Western, Southeast and Central Florida offer different lifestyles and buying opportunities—the latter is a hot market year-round for long- and short-term rentals. Depending on your investment objective, Florida has a lot to offer at a wide range of prices.”

2021-02-26 14:46:34

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