Month: August 2021

Rising inflation is a growing concern, but real estate investors can rest assured that their investments are, at least for the time being, inflation-proof.

“Real estate has been protected from inflation since the 1970s but it won’t work if there’s anything extreme, if we go back to a 15% benchmark interest rate,” said Patrice Groleau, owner of McGill Real Estate and of Engel & Völkers’ rights to the Quebec market.

However, even if rates somehow surged into the double digits, the value of real estate is mostly tied to the value of land and the cost of construction, namely materials and labour, which rise commensurately with inflation.

After the subprime mortgage fiasco that led to the Great Recession, real estate in major cities like Miami and New York quickly returned to their base values, which Groleau noted is why investors always pounce on properties in the immediate aftermath of economic downturns. Nevertheless, under normal economic conditions, inflation increases slowly and is always matched by rents, offering property investors a measure of protection.

“Rents adjust to inflation. In Quebec, every time you have a rental increase, the government looks at inflation to justify that increase, and if the price of rent goes up, the value of the building obviously goes up too,” said Groleau. “The problem with monetary policy in Canada is most decisions are all based on inflation—the biggest concern for the government is always inflation, inflation, inflation, so as soon as inflation rises, you see a direct link to real estate. It’s not perfect but if you look at all other options, there’s almost nothing better than that. Stocks don’t even match inflation the way real estate does, unless they’re blue chips.”

Groleau added that two-thirds of a downtown property’s value is tied up in the land, with the remainder determined by material costs, while it’s the opposite in suburban markets.

It is highly unlikely that interest rates reach the double digits, at least any time soon. In Japan, for example, interest rates have been near the basement since the aughties and Groleau suggests that, with Canada following suit—many advanced economies have had declining interest rates for over two decades—real estate is one of the safest investments today.

“As Andrew Carnegie said, ‘90% of all millionaires became so through owning real estate,’” said Groleau. “It has a stable core value over time because everybody needs somewhere to live, and every study and financial professional I’ve spoken to says we will follow the Japanese model. People don’t think rates can stay low forever, but in Japan they’ve been low since the early 2000s and inflation is under control.”

Tokenization is the fractional ownership of real estate, and while it’s been around for years, blockchain is taking it to a whole new level.

According to a report from Moore Global, an international account firm, blockchain tokenization has emerged as a mega trend in international real estate because, in addition to enhancing liquidity, efficiency and investor pools, it reduces the cost of capital. With tokenization slated to comprise 0.5% of the $280 trillion global property market—or approximately $1.4 trillion—over the next half decade, David Natale, global leader of Moore Global’s Real Estate group, anticipates it’s the next great disruptor for reasons ranging from the creation of innovative financial products to easily divesting assets at both optimal times and prices.

“The technology allows you to take a hundredth interest you could never sell outside of larger transactions and trade it on a blockchain to another individual,” Natale told CREW. “It’s really going to democratize individuals’ abilities to invest in real estate. Today, if I wanted to invest in a real estate asset, say an office building, it would be pretty limited as to how I could do that—it would either be through a REIT structure or, if I’m a high-net-worth individual aware of a syndication deal and I’m invited to participate, I have the opportunity to invest there. Tokenization takes single-purpose assets and creates the opportunity to invest in that asset publicly. You make the financial information related to that asset available to the public and people can make decisions about if they want to buy or sell on that unit based on that amount, and it opens up opportunities for individuals which didn’t previously exist.”

These particular investments used to be the domain of large institutional players, but that individuals can now determine their investment trajectories is indeed a game changer. Investors have long been hampered by the fact that real estate is, by and large, an illiquid asset class, but Natale says that nascent secondary markets where property can be traded digitally will rectify that.

With a centralized deal-reporting database lacking and digital asset trading platforms operating disparately, it’s impossible to ascertain the exact value of tokenized global real estate, but Moore Global says it’s surged in recent years to comprise billions of dollars, adding that the value of individual deals is, for the most part, growing. Moreover, Moore says that institutional investors have mostly eschewed participation as they continue scrutinizing the burgeoning market and wait for the dust to settle on regulatory regimes, but tokenization has, in the interim, opened real estate to a wider swath of investors.

“I know exactly what I’m buying into and I can buy and sell as I wish based on the information available,” said Natale, “but we’re talking about replicating that opportunity on a blockchain rather than a public exchange with all its limitations.”

We are in the middle of a housing crisis here in the GTA and across Ontario—and Canada for that matter. The cost of building new homes continues to rise. The situation is dire and hampering our economic growth.

The shortage of affordable housing is costing the GTA up to $7.9 billion annually, according to a report released by the Toronto Region Board of Trade (TRBT) and WoodGreen Community Services. Over a five-year period, cumulative losses could amount to an estimated $29.4-37.9 billion.

It’s a very stark and eye-opening assessment of how a shortage of affordable housing is already harming our economy and society, and, as TRBT president and CEO Jan De Silva has so rightly noted, how the staggering numbers show that housing solutions must be part of our recovery plan.

There is some light on the horizon, however, as the City of Toronto has embarked on a crusade to dramatically overhaul and accelerate the system for reviewing development applications. This will undoubtedly benefit our community of builders and new homebuyers by speeding up the review process.

The initiative is called Concept 2 Keys, or C2K. It will radically transform how planning and development applications are reviewed by modernizing organizational structures, processes, and technology.

The initiative was started in 2020 and the goal is to remove obstacles that slow down the development review process and, in turn, make the system more efficient with shorter turnarounds.

The new review process will help to ensure problems with applications are identified and resolved early on, with the goal of producing more efficient reviews.

Technology will be used to make submitting a development application more convenient and transparent for applicants and easier and less time-consuming for city staff to process, manage and prioritize.

In the first phase of the project, 21 affordable housing development projects were prioritized and expedited. As part of the process, a new application management function was set up to oversee development applications.

The second phase of the project was launched in June and is focused on applications in the Etobicoke-York geographic planning area. The idea here is to test the process and technology improvements.

In time, the initiative will be rolled out to other areas of the GTA.

The builder community is certainly supportive of this initiative. Considering our dire housing situation, we must speed-up the development review process in order to get homes built. A more efficient development review system will enable housing to be delivered faster and reduce costs for consumers, new home buyers, renters and those in need of social housing.

There are a number of factors that cause higher prices for new homes, such as rising costs for materials and labour, but speeding up the review process would certainly improve the situation.

We can’t just continue along the same path. The lack of housing will stymie our growth if we don’t take action. Our housing-to-population ratio is the lowest of any G7 nation and, with more than 400,000 immigrants expected to come into Canada in both 2021 and 2022, the situation will only get worse.

The C2K initiative is a step in the right direction.

Richard Lyall, president of RESCON, has represented the building industry in Ontario since 1991. Contact him at [email protected]

Parsimonious rental data in the GTA makes tracking hotspots difficult, but stories about leasing bidding wars are commonplace and, according to the president of the Residential Construction Council of Ontario (RESCON), that’s a direct consequence of developments completing at a snail’s pace.

“I’ve been hearing about bidding wars on rentals. You’ve got bidding wars on single-family homes in York Region because people looking for houses have to pay 10-20% more than the asking price in certain situations, so they’re priced out as buyers. I’ve been hearing stories about people having to pay a full year’s rent up front to rent those same places,” said Richard Lyall. “We have a housing supply crisis; we’re not building enough according to our current demographical needs and we’re running an annual housing deficit. The biggest problem in all this is the process through which projects get approved, and go through rezoning and site plan restrictions, takes too long.”

Insufficient housing supply has been blamed for exorbitant ownership price points, but Lyall contends that it also explains why rents are so high. There’s a pronounced dearth of purpose-built rental units in the GTA and investor-owned condominiums have resultantly become surrogates, he says, however, they’re without the same security of tenure that purpose-built rentals offer, to say nothing of their inadequate supply.

In fact, to understand the depth of the neglect and how it roils GTA rental markets today, Brampton, located just west of York Region, is getting its first purpose-built rental development in 17 years. But that bidding wars to lease single-family homes are increasingly common is a newer development.

Dr. Murtaza Haider, a professor in Ryerson University’s department of real estate management, says York Region’s low-rise homes are hot commodities because, unlike purpose-built rental and condo apartments, they provide families functional space, and the existing paucity of family-sized units has sparked demand for homes that are typically end user-oriented.

“It has to be in the low-rise segment because those units are desirable for families,” he said. “Rental households are smaller in size than non-renter households, and low-rise houses are more desirable for families with children, especially school-aged children, therefore, competition, when it arises because of proximity to subways and transportation infrastructure, makes a difference. Proximity to a park makes a difference, but proximity to highly regarded schools also triggers competition between interested renters.”

Citing monthly rental data, Dr. Haider says that bidding wars don’t occur with every vacancy, but they tend to cluster in desired neighbourhoods and buildings.

“If rents don’t increase drastically, that is my evidence that, while bidding wars are happening, they don’t have the ability to move the average market rent because they’re sporadic, sparse and concentrated in certain areas by virtue of location or by virtue of the list price,” he said. “Typically, adequately listed units won’t see bidding wars, but coveted school districts could spark bidding wars if a house in a particular catchment becomes available.”

Dr. Haider surmises that, to some extent, fierce competition in the low-rise rental market has to do with York Region having more immigrant households than Toronto proper, and because some communities put such a premium on education that desirable catchment areas determine where they live.

“What I can comment is that in York Region—that is, the areas north of Steeles—there’s a higher concentration of immigrant families unlike the City of Toronto, which has a lower concentration of immigrant families, but when you have families that put a higher premium on education for their children, then location decisions are motivated by proximity to good quality schools.”

Although family-sized rental housing is a pressing issue, Lyall says creating sufficient supply of purpose-built rentals is a priority because that will keep rents in check, which would help families, especially those on the margins.

“We’re not building enough housing to meet our needs. Prior to COVID coming along, we had a serious housing supply deficit in Ontario of 25,000 units,” said Lyall, adding that price surges in the aftermath of the pandemic created an even larger pool of renters who couldn’t afford to purchase. “Demand for all forms of housing went up. In York Region, they don’t build enough purpose-built rental units, and half the people who work in York Region can’t afford to live there, for starters, and we’re grossly under supplying housing.”

Canada’s three biggest cities will be the main recipients of a record number of permanent residents slated to arrive through 2023, and that bodes well for the cities’ luxury real estate markets, which have a lot of room for growth, but don’t count out sleeper markets, says the president and CEO of Engel & Völkers Americas.

“The premium markets in cities like Toronto, Montreal and Vancouver will continue to command international interest, but Halifax and Ottawa are premium markets to watch,” said Anthony Hitt. “The real estate market has proven to be a safe and sound place to invest. Canada’s major cities are largely undervalued compared to other global destinations, leaving room for market appreciation. However, international buyers are mostly attracted to Canada for its lifestyle and culture. For example, Vancouver’s appeal is its close proximity to nature. Toronto is known for its diversity and culture. Montreal attracts interest from French-speaking countries like Belgium. People want to purchase property that is a sound investment, but also rivals the lifestyle they are used to in their home countries.”

Luxury buyers are primarily drawn to metropolitan cities because they’re usually centres of commerce, but Hitt noted that as smaller cities not typically recognized for their business sectors begin cultivating niche industries, their allure with moneyed buyers will grow.

“Lately we’ve been seeing other cities emerge as luxury property destinations, like Ottawa and Halifax. International buyers are drawn to Ottawa for its growing entrepreneurial and tech industries, where companies like Shopify are basing Canadian headquarters and recruiting international experts from Silicon Valley and San Francisco,” he said. “Halifax is a luxury market that is still new, but has great potential due to the unparalleled lifestyle one can find in the East Coast.”

International buyers aren’t the only purchasers of luxury real estate, reminded Don Kottick, president and CEO of Sotheby’s International Realty Canada, adding that remote working configurations sparked a housing rush predicated on securing adequate space. Moreover, as desirable as Canadian real estate is globally, Canadians have been the driving force behind luxury purchases in large and small cities alike—a trend wholly abetted by record-low borrowing rates and stability in real estate as an asset class.

“One thing the pandemic has taught us is the importance of home and space. Affluent Canadians seeking to improve their lifestyles have been the driving force behind the increase in luxury activity across the country. People are willing to pay more to increase and elevate their living spaces, whether that is by upsizing, or by moving to a home that offers higher-quality design, finishes and amenities,” he said.

“Low-interest rates and the desire to diversify asset portfolios, given recent turmoil in the stock market, is also motivating many to invest more into their homes, or into vacation and investment properties. At the same time, many Canadians who were fortunate to remain employed through the pandemic have significant cash savings, and with recent speculation about the risk of inflation, some are choosing real estate as a place to invest their finances.”

Transit is arguably the greatest value booster a property can have, and Hamilton’s West Harbour neighbourhood has gotten just that.

West Harbour GO, which until last week only offered an express train to Toronto’s Union Station during rush hour, is getting all-day service, and according to the founder and CEO of the Sandy MacKay Realty Network, West Harbour is Hamilton’s next hot spot.

“I’ve always looked at West Harbour as a place with so much potential because it’s right by the water, it has Bay Front Park, a yacht club and all sorts of outdoorsy activities. It has a new brewery that’s been very successful and restaurants are gradually coming in,” said Sandy MacKay. “Being within a kilometre of major transportation hubs like GO Trains or highways will add a significant boost in value too, and that’s what West Harbour properties are getting. It’s exciting for people who own properties there or are looking to buy properties there. There will be increases in rental rates, because whether you rent or own, you want to live around transportation.”

MacKay anticipates that rents in West Harbour, which is located in Hamilton’s north end, will grow 10-20% higher than surrounding areas because of its all-day GO Train access, and that will make working in, or otherwise commuting to, Toronto simple. Gone are the days when West Harbour residents had to travel to Hamilton’s south end to catch a connection to downtown Toronto, says MacKay.

In the coming years, the neighbourhood will also be home to new residential development, including Waterfront Shores, a condominium development that promises waterfront views and proximity to McMaster University.

“There is a lot happening in West Harbour, including new commercial units, and while it’s a neighbourhood that’s been underutilized for years, a lot of money is beginning to flow into the area,” said MacKay. “Investors are creating new housing or updating what’s there with renovations. It’s a fairly older community but there are a lot of new uses coming in that are reinvigorating the place. Nicer houses are being built there and the neighbourhood profile is changing with the addition of a more outdoorsy crowd to enliven the streets.”

West Habour’s best days are ahead of it and MacKay says that investors would be wise to get in now. Although all-day GO Train service is a major boon for property values, he says nearby James St. N. is already making West Harbour popular among locals.

“It tacks on to James St. N., which has been a great area for nightlife and restaurants,” said MacKay. “It’s located on the south side of West Harbour and the GO Train separates the two neighbourhoods.”

Canada’s three biggest cities will be the main recipients of a record number of permanent residents slated to arrive through 2023, and that bodes well for the cities’ luxury real estate markets, which have a lot of room for growth, but don’t count out sleeper markets, says the president and CEO of Engel & Völkers Americas.

“The premium markets in cities like Toronto, Montreal and Vancouver will continue to command international interest, but Halifax and Ottawa are premium markets to watch,” said Anthony Hitt. “The real estate market has proven to be a safe and sound place to invest. Canada’s major cities are largely undervalued compared to other global destinations, leaving room for market appreciation. However, international buyers are mostly attracted to Canada for its lifestyle and culture. For example, Vancouver’s appeal is its close proximity to nature. Toronto is known for its diversity and culture. Montreal attracts interest from French-speaking countries like Belgium. People want to purchase property that is a sound investment, but also rivals the lifestyle they are used to in their home countries.”

Luxury buyers are primarily drawn to metropolitan cities because they’re usually centres of commerce, but Hitt noted that as smaller cities not typically recognized for their business sectors begin cultivating niche industries, their allure with moneyed buyers will grow.

“Lately we’ve been seeing other cities emerge as luxury property destinations, like Ottawa and Halifax. International buyers are drawn to Ottawa for its growing entrepreneurial and tech industries, where companies like Shopify are basing Canadian headquarters and recruiting international experts from Silicon Valley and San Francisco,” he said. “Halifax is a luxury market that is still new, but has great potential due to the unparalleled lifestyle one can find in the East Coast.”

International buyers aren’t the only purchasers of luxury real estate, reminded Don Kottick, president and CEO of Sotheby’s International Realty Canada, adding that remote working configurations sparked a housing rush predicated on securing adequate space. Moreover, as desirable as Canadian real estate is globally, Canadians have been the driving force behind luxury purchases in large and small cities alike—a trend wholly abetted by record-low borrowing rates and stability in real estate as an asset class.

“One thing the pandemic has taught us is the importance of home and space. Affluent Canadians seeking to improve their lifestyles have been the driving force behind the increase in luxury activity across the country. People are willing to pay more to increase and elevate their living spaces, whether that is by upsizing, or by moving to a home that offers higher-quality design, finishes and amenities,” he said.

“Low-interest rates and the desire to diversify asset portfolios, given recent turmoil in the stock market, is also motivating many to invest more into their homes, or into vacation and investment properties. At the same time, many Canadians who were fortunate to remain employed through the pandemic have significant cash savings, and with recent speculation about the risk of inflation, some are choosing real estate as a place to invest their finances.”

Transit is arguably the greatest value booster a property can have, and Hamilton’s West Harbour neighbourhood has gotten just that.

West Harbour GO, which until last week only offered an express train to Toronto’s Union Station during rush hour, is getting all-day service, and according to the founder and CEO of the Sandy MacKay Realty Network, West Harbour is Hamilton’s next hot spot.

“I’ve always looked at West Harbour as a place with so much potential because it’s right by the water, it has Bay Front Park, a yacht club and all sorts of outdoorsy activities. It has a new brewery that’s been very successful and restaurants are gradually coming in,” said Sandy MacKay. “Being within a kilometre of major transportation hubs like GO Trains or highways will add a significant boost in value too, and that’s what West Harbour properties are getting. It’s exciting for people who own properties there or are looking to buy properties there. There will be increases in rental rates, because whether you rent or own, you want to live around transportation.”

MacKay anticipates that rents in West Harbour, which is located in Hamilton’s north end, will grow 10-20% higher than surrounding areas because of its all-day GO Train access, and that will make working in, or otherwise commuting to, Toronto simple. Gone are the days when West Harbour residents had to travel to Hamilton’s south end to catch a connection to downtown Toronto, says MacKay.

In the coming years, the neighbourhood will also be home to new residential development, including Waterfront Shores, a condominium development that promises waterfront views and proximity to McMaster University.

“There is a lot happening in West Harbour, including new commercial units, and while it’s a neighbourhood that’s been underutilized for years, a lot of money is beginning to flow into the area,” said MacKay. “Investors are creating new housing or updating what’s there with renovations. It’s a fairly older community but there are a lot of new uses coming in that are reinvigorating the place. Nicer houses are being built there and the neighbourhood profile is changing with the addition of a more outdoorsy crowd to enliven the streets.”

West Habour’s best days are ahead of it and MacKay says that investors would be wise to get in now. Although all-day GO Train service is a major boon for property values, he says nearby James St. N. is already making West Harbour popular among locals.

“It tacks on to James St. N., which has been a great area for nightlife and restaurants,” said MacKay. “It’s located on the south side of West Harbour and the GO Train separates the two neighbourhoods.”

Canada’s office sector showed signs of improvement in Q2, according to a quarterly report from Morguard, which also noted that renewal discussions for office space in the nation’s major downtown business districts were promising.

Although still early, activity in the office sector has been positive. In Q2, private sector office tenants started making long-term premises decisions, demand for sublease space, especially if furnished, increased for the first time in a year, while a growing number of tenants removed sublease space from the market, indicating employees began returning to offices amid rising COVID-19 inoculation rates. Additionally, while vacancy levels did increase, it occurred at a decelerated pace for the first in nearly a full year, reported Morguard. The national downtown vacancy rate increased by 50 basis points to 14.9% in Q2-2021—a vast improvement compared to the previous 12-month period during which the quarterly average vacancy rate increase was 1.28%.

Morguard’s report also expressed confidence that commercial leasing activity in Canada would become more robust going forward, again due to rising vaccination rates and eased pandemic-related restrictions that are believed will continue into autumn. In fact, with economic growth forecasted for H2-2021, leasing activity is slated to commensurately increase. Moreover, the return of international students and immigrants to Canada will bolster multifamily residential rental demand, and even retailer leasing will rise with shopping malls reopening.

Unsurprisingly, the industrial market was strong in Q2, with Morguard noting that it “continued its impressive run.” Transaction closing activity was very strong during the quarter, thanks to “strong interest from institutional, private and public capital groups,” all of which bid aggressively on functional warehouse and distribution and logistics properties Canada-wide. As a result of brisk competition for limited supply, investors even scooped up older facilities to modernize them. All of this conspired to put even more downward pressure on low low cap rates and upward pressure on rents, thereby driving up property valuations. The industrial’s sectors vibrancy will continue through the remainder of the year and into 2022, said Morguard.

Investors with too many doors sometimes do themselves a disservice when they try expanding their portfolios because lenders typically only look at their income, but not Freedom Capital.

The mortgage brokerage, which specializes in private, alternative and commercial deals, draws upon relationships with lenders to focus on investors’ equity, meaning that having more doors to their name is a boon, not a detriment.

“Often, investors go to banks and they don’t get approved, but we don’t get approvals based on income, we get them based on equity, so if they pull equity out of their existing investments, we can help get them their next door,” said Pip Dhaliwal, founder and CEO of Freedom Capital. “Investors can have unlimited doors in their portfolios to get financing.”

Dhaliwal noted that investors often use Freedom Capital to secure private financing for the purpose of renovating a property to increase its value, and then refinance it through a chartered bank.

“We’re quick and easy money, if they’re looking for something with no hassle,” continued Dhaliwal. “After one year, they can reopen and there’s no penalty for early payouts. If they renovate the property, they pay higher interest, but they make that money back in their net profit when they flip it.”

On first mortgages, Freedom Capital secures rates starting around 5%, and 10% for second mortgages, while it can lock in a 7% rate for land deals. Dhaliwal added that real estate investors aren’t the only clients Freedom Capital services.

“Entrepreneurs and other self-employed people typically don’t qualify on a lot of commercial and residential files, and I started Freedom Capital because I saw a huge need in the market,” she said. “Most brokers try to do every kind of business, like conventional with banks in addition to private, whereas our team only does private and we leverage our excellent relationships with lenders because we give them so much business. Our sole purpose is to provide solutions for people who aren’t getting approved at banks.”

In addition to finding out-of-luck borrowers solutions, Freedom Capital, which operates in British Columbia, Alberta and Ontario, prides itself on quick turnaround times, which seldom exceed 48 hours. Regular files can close in as quickly as a week and a half, says Dhaliwal.

“Our rates and the speed with which we get approvals is what sets us apart in the marketplace. One of the reasons lenders trust us is because we look at everything and only submit complete files. Most brokers are transactional, but we look at the entire financial picture, determine what you need and find you solutions.”