Pension Funds Swoop In On Downtown Toronto Condo Towers As Rental Market Heats Up

Paul Finkbeiner hasn’t pulled the trigger yet but the head of GWL Realty Advisors, which has more than $16 billion in assets under management, doesn’t rule out moving into the condominium sector.

It may seem incongruous for a company that is a subsidiary of The Great-West Life Assurance Company to be interested in tiny condominiums for investments but managers like Mr. Finkbeiner are eyeing a bigger fish — namely an entire condo building.

“This is a very popular asset class for pension funds. They like apartment buildings,” said Mr. Finkbeiner, noting that depending on local rules those condo towers can be turned into rentals. Trend may be too strong a word right now but two transactions in Toronto that saw institutional buyers swoop in and make offers to condo developers for entire buildings, squeezing out all the small-time investors, have caught the eye of people in the high-rise industry.

In one case, Toronto’s red-hot Liberty Village, a neighbourhood being transformed in the city’s western downtown core, saw Urbancorp cancel a major project — with industry insiders saying the project was sold en masse to one investor.

Another key deal saw an institutional player make a proposed 49-storey condo building near one of the city’s main intersections at Yonge and Bloor into a de facto rental when Cityzen Development Corp. received an offer.

“Pension funds have always liked rental. Condominiums don’t fit. But rental does because they are trying to get long-term cash flow,” said Mr. Finkbeiner, adding the key is price with institutions acting opportunistically when condo prices come down. “You’ve got a lot of condo developers who may have two sites beside one another and as time goes on they say, ‘I don’t want to take all that risk.’ So they offer the land from one of them, and [the rights] to build it, to a pension fund.”

Sam Crignano, president of Cityzen, said his company received approval for a site and had started a marketing campaign when it was approached by an institutional investor (which he won’t name) that wanted to purchase the whole property and make it what is called purpose-built rental.

“They made us an offer we couldn’t refuse so we ended up selling it,” said Mr. Crignano, who was able to save on marketing costs and real estate commissions. “I’ve been working on other deals too, so this didn’t surprise me. We’ve been looking at the rental market for some time. These institutions are having a difficult time finding opportunities.”

Rental vacancy rates across the country remain very tight with Toronto under 2%, according to Canada Mortgage and Housing Corp. Rental rates have also continued to grow, which has driven construction of new rental buildings in Ontario to a 20-year high. Nationally, apartment construction was up 2.7% from October 2013 to October 2014.

“We’re not hitting the highs we saw in the 1960s and 1970,” said Ted Tsiakopoulos, regional economist for Ontario for CMHC. “What’s driving this is rental vacancy rates [not including units from condo investors], they peaked in 2004 and they’ve been trending down.”

Another factor is the value of existing rental buildings continues to rise with the capitalization rates on some properties below 4%. The capitalization rate is a measure of how fast an investment will pay for itself, a lower rate implying a higher building valuation. A 5% rate implies it would take 20 years for an investment to pay for itself. “These rates are a lot better than you’ll get on a bond,” said Mr. Tsiakopoulos, adding institutional players looking for higher yields have been throwing money at existing apartment buildings making them all that much more expensive. “It makes the economics of building something look better.”

Developer Brad Lamb says funds are calling him all the time trying to get him to sell his condo projects because real estate in Canada, particularly Toronto, remains hot.

“I’ve got pension funds, real estate investment trusts, private equity funds,” said Mr. Lamb. “They’re telling us, ‘Don’t bring it to market. Don’t sell it. We want it and we’ll operate it as a rental building.’ It’s a gigantic new market in Canada.”

The trend can only go so far, according to David Goodman, a Vancouver-based broker with HQ Commercial who says prices for land are probably too high in his city to make it work. Plus, he adds, construction costs are about 25% higher in Vancouver than Toronto, making last-minute deals for entire condos less likely.

“Wow. The thought of one investor coming in and taking a whole building — that would just set off a firestorm here. It does show the need and demand for rental product in Toronto,” said Mr. Goodman. “The time has come in Toronto. We’re not seeing it yet in Vancouver, but I think it’s a brilliant move by people back east.”

Credits: www.financialpost.com