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First-time home buyers should think wisely about recreational properies

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First-time home buyers eager to get into the housing market should think twice about buying a recreational property first, real estate experts say.

“It’s more of a lifestyle choice than it is a great investment choice,” says Brad Henderson, former president and CEO of Sotheby’s International Realty Canada.

Some hot locations such as the Muskoka Lakes, Georgian Bay or Collingwood north of Toronto are seeing prices soar because of short supply — and properties there may now be as unaffordable as Toronto. That’s prompted potential buyers to look eastward in Ontario, at real estate in Prince Edward County, or westward to the shores of Lake Erie.

These types of purchases could be good for someone planning to use it as a weekend getaway or summer retreat, but the properties typically need to be within a three-hour drive of the city.

While more affordable than urban housing, recreational homes typically appreciate at a slower pace than city homes, Henderson said.

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“So if not on a lake or close to mountains, those properties follow the market versus lead it, whereas well-located properties in Toronto, Vancouver, Calgary and Montreal will tend to appreciate at a faster rate.”

Canadians have been buying recreational land before they own principal residences for decades, often parking a motor home or pitching tents until they’re ready to build.

And the rising cost of urban housing may be opening the idea to more buyers.

“One of the trends that has been identified in Ontario particularly was this first home purchase in cottage country,” says said Phil Soper, CEO of Royal LePage. “Now, it’s a relatively small slice of the market, but it was big enough that it came through in our interviews of our practitioners in the field.”

In addition to areas around Toronto, some buyers in British Columbia are also opting for recreational properties as their first purchase.

Short-term rental services like Airbnb, cottage rental websites and VRBO can help to offset some of the costs by facilitating the rental of the recreational residence.

Due diligence is required, however, because some rural municipalities such as Quebec’s Morin Heights and St. Sauveur have imposed bylaws banning Airbnb rentals in some zones.

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Soper said purchasing a recreational property is normally viewed as a luxury.

“I know some people justify it as a financial investment because typically property appreciates over time. But recreational property doesn’t appreciate in the predictable, reliable way that urban property does.”

The sale prices of recreational properties in Ontario and Quebec are currently increasing at about 7 per cent, compared to little increase at all for urban locations following a correction. But Soper said that’s an anomaly.

The recreational market was dead in the post-recession years, but is strong now because of low unemployment, implied wealth from urban home prices and the Canadian dollar making it attractive to U.S. buyers.

“But that’s not something you should bet on,” he said in an interview.

“Buy it for a lifestyle decision. Buy it for your children … Buying a rec property purely for investment is not a good decision.”

Royal LePage’s 2019 recreational report says overall prices rose 5 per cent to $411,471 last year as low inventory caused sales to decrease 8.3 per cent. Prices are forecast to increase 4.7 per cent this year, led by high demand in Ontario and Quebec to offset softer market conditions in British Columbia.

John Pasalis, president of the Toronto-based firm Realosophy Realty Inc., says the cost of housing in Greater Toronto is prompting buyers who feel they need to be in the real estate market to buy what they can, which is a cottage.

“I think buyers need to be cautious and really understand that cottages do not move at the same rate as the city of Toronto housing market. So if they’re expecting really, really big gains in capital they might be surprised in five or 10 years to see what their cottages are worth.”

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Financing rush makes real estate the hottest sector on Bay Street

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RioCan Real Estate Investment Trust is the latest to announce a share sale, launching a $200-million offering late Thursday.

Fred Lum/The Globe and Mail

Canadian real estate investment trusts are capitalizing on a growing hunger for yield-driven stocks, tapping investors for fresh cash in an unexpected flurry of financings.

REITs have raised $1.3-billion through share sales since the start of September, outpacing any other sector in Canada and extending a string of deals over the past year that now totals $6.2-billion.

RioCan Real Estate Investment Trust is the latest to announce a share sale, launching a $200-million offering late Thursday. The market is so hot for real estate that Bay Street has seen six REIT financings this month and apartment-focused Continuum Residential Real Estate Investment Trust is attempting a $300-million initial public offering.

With so many deals, the real estate sector this year has raised roughly triple the amount brought in by the once-soaring cannabis industry in 2019.

Falling interest rates have largely fuelled the REIT rally. Bond yields have tumbled around the world and US$13-trillion worth of debt now trades with negative yields. In this environment, the S&P/TSX Capped REIT Index’s average yield of 4.4 per cent looks rather compelling.

This index has delivered a total return of 24 per cent since January, while the S&P/TSX Composite Index has delivered a return of 18 per cent on the same basis.

Canadian REITs have also lured investors with their strong fundamentals, dispelling worries that slower economic growth would hurt their bottom lines. “REITs have very attractive cash flow per share growth driven by pipelines of internally generated projects,” said Sante Corona, head of equity capital markets at TD Securities.

Apartment-focused REITs have been one of the hottest corners of the real estate market, buoyed by high occupancy rates and strong rent increases whenever one tenant vacates and another moves in. There is also strong demand for these types of property owners because population growth has been outstripping the new supply of rental units in many large Canadian cities.

Canadian Apartment Properties Real Estate Investment Trust, the largest publicly traded apartment owner, had an average occupancy of 98.3 per cent across its entire portfolio at the end of its last quarter, and some apartment REITs have shown that their rents can jump 25 per cent on tenant turnover.

Since going public in the first half of 2018, Minto Apartment REIT has watched its unit price jump 55 per cent. The REIT recently raised $225-million on the same day that its units set a new high, and the offering was priced to yield 1.9 per cent, an uncommonly low level for a Canadian REIT.

Continuum is attempting its IPO at a 2-per-cent yield on the back of Minto’s success.

Because pricing has been so advantageous, many REITs are rushing to finance while they can. “Our real estate clients have been taking advantage of the positive backdrop to raise equity to finance accretive acquisitions and property development,” said Tyler Swan, managing director of equity capital markets at CIBC World Markets.

Even retail REITs are winning investors back. Despite fears that digital giants such as Amazon.com Inc. will steal business at an alarming rate, retail landlords secured tenant renewal rate increases of roughly 4 per cent on average in 2018, according to a team of analysts at CIBC.

“We believe that the headwinds facing the retail sector are indeed real; however, the operating performance of the underlying real estate appears to be at odds with the significant unit price underperformance relative to other REIT sub-sectors,” the analysts wrote in a note in early October.

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Fronsac Real Estate Investment Trust might be Overpaying Its CEO?

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Jason Parravano became the CEO of Fronsac Real Estate Investment Trust (CVE:FRO.UN) in 2017. This report will, first, examine the CEO compensation levels in comparison to CEO compensation at companies of similar size. After that, we will consider the growth in the business. And finally – as a second measure of performance – we will look at the returns shareholders have received over the last few years. The aim of all this is to consider the appropriateness of CEO pay levels.

See our latest analysis for Fronsac Real Estate Investment Trust

How Does Jason Parravano’s Compensation Compare With Similar Sized Companies?

According to our data, Fronsac Real Estate Investment Trust has a market capitalization of CA$81m, and paid its CEO total annual compensation worth CA$147k over the year to December 2018. While this analysis focuses on total compensation, it’s worth noting the salary is lower, valued at CA$135k. We looked at a group of companies with market capitalizations under CA$263m, and the median CEO total compensation was CA$161k.

So Jason Parravano is paid around the average of the companies we looked at. This doesn’t tell us a whole lot on its own, but looking at the performance of the actual business will give us useful context.

The graphic below shows how CEO compensation at Fronsac Real Estate Investment Trust has changed from year to year.

TSXV:FRO.UN CEO Compensation, October 20th 2019

Is Fronsac Real Estate Investment Trust Growing?

Over the last three years Fronsac Real Estate Investment Trust has shrunk its earnings per share by an average of 51% per year (measured with a line of best fit). It achieved revenue growth of 43% over the last year.

As investors, we are a bit wary of companies that have lower earnings per share, over three years. But on the other hand, revenue growth is strong, suggesting a brighter future. It’s hard to reach a conclusion about business performance right now. This may be one to watch. You might want to check this free visual report on analyst forecasts for future earnings.

Has Fronsac Real Estate Investment Trust Been A Good Investment?

Most shareholders would probably be pleased with Fronsac Real Estate Investment Trust for providing a total return of 42% over three years. This strong performance might mean some shareholders don’t mind if the CEO were to be paid more than is normal for a company of its size.

In Summary…

Remuneration for Jason Parravano is close enough to the median pay for a CEO of a similar sized company .

While we would like to see improved growth metrics, there is no doubt that the total returns have been great, over the last three years. So considering most shareholders would be happy, we’d say the CEO pay is appropriate. If you think CEO compensation levels are interesting you will probably really like this free visualization of insider trading at Fronsac Real Estate Investment Trust.

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Slowdown on Gripped Iran Real-Estate Market

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A serious and historic slowdown has gripped Iran’s residential real-estate market, with nationwide sales down 55 percent this month compared with the same period last year.

Iran’s semi-official ISNA news agency says nationwide sales from September 21-October 6 were 16,400 units, a huge drop from the previous year when around 35,000 units were sold in the same period.

The main reasons for the drop is a deep economic recession and high inflation, which have affected the middle class, especially people on fixed incomes and salaries. They simply spend their money on bare necessities and are priced out of the market for buying an apartment. Some can barely afford rising rents, especially that in Iran owners demand extra cash for signing a rental agreement.

But oddly, high prices are also a reason why those buyers who have the money sit on the fence and wait to see a more reasonable market. Prices have risen anywhere from 70-200 percent in the last 18 months.

If there is an economic recession, why have prices gone up? The reason for this is a steep devaluation of the local currency. The rial has lost its value against the U.S. dollar and other major currencies fourfold since February 2018, mainly as a result of crippling American sanctions.

Owners of homes and apartments think of asking prices for their properties in terms of dollars, not the local currency. Therefore, prices owners demand easily double and triple. In fact, calculated in dollars, real estate prices have not risen at all. One square meter in Tehran goes for an average price of $1,200 or $110 per square foot. This is much lower than in other capital cities in the world.

But people with fixed incomes are not earning dollars to be able to afford the higher prices. In short, a combination of high prices in local currency and lack of jobs and higher incomes have pushed sales down.

However, prices seem to be slowly declining, as those owners who need to sell are ready to bargain. There are also buyers with ready cash who want to take advantage if the price is right. For them, it is a strategy to protect their capital in Iranian currency from further devaluation – invest in real estate.

In the last 30 days, sales in Tehran have improved by 25 percent, according to ISNA and real-estate agents who have spoken with local media. This might signal a better balance between demand and supply as prices have edged lower. But still the volume of sales remains much lower than last year and a fraction of what it was in 2017, before U.S. sanctions.

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