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Canada Real Estate Is Due for a Crash

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One of Canada’s most resilient and prolific sectors has been its real estate market. The residential market has mainly been on a consistent rise for the last several years. Canadians already know this. It is the reason for the buzzing activity in the housing market since the 2008 financial crisis.

As immigration increased, so did the demand for housing in major urban centres throughout Toronto, Vancouver, and other Canadian cities. Real estate investors who could afford to buy houses saw their wealth grow substantially over the years. However, it is not all good news for real estate investors.

Looming crisis

When countries face major economic crises, they tend to double down on balancing their growing local economies and housing prices. Canada went the other way with the crash of ’08, and we saw home prices skyrocket in the ensuing years. While many countries saw a decrease in home prices, Canada’s real estate market grew three times as fast as any other G7 country since 2005.

Let’s consider other real estate markets to give you a better perspective. The financial crisis was a global problem. In the last 15 years, Canada’s average housing prices increased by almost 90%. Germany has the second-fastest growth in its residential real estate prices at a more modest 32.3%. The difference is astounding.

The U.S. market went down 3.29% in the first quarter this year, but Canada saw an increase of 3.39% in the same period. Canada’s economy heavily relies on its housing market. The rapid growth is not a positive sign. In a harsh economic landscape, such rapid growth is a sign of a looming crisis just waiting to happen.

Real estate will get cheaper

If you have had an interest in the real estate market for a long time, you might have an opportunity on your hands. Despite unemployment rates decreasing in the last three months, the figures are among the highest in Canada’s history. Almost 1.8 million Canadians remain jobless.

Due to strict travel restrictions, immigration has also drastically declined. While economies are gradually opening up, the inflow of new residents will be low until the pandemic subsides. Both of these factors can cause the housing market activity to dip and decrease demand.

The Canada Mortgage and Housing Corporation (CMHC) predicted an 18% decline in housing prices this year. The seemingly far-fetched prediction might become real. It will drastically decrease homes’ value and bring the real estate market to more attractive prices than they have been in the last decade. You can get the chance to buy a house on a bargain.

Protecting your wealth

You need to protect your wealth from the effects of a housing crash, so you can invest at the right time. I cannot predict when the market crash will happen, but it would be good to keep a close watch on trends moving forward. Meanwhile, you should protect your capital. Storing it under your mattress can keep it safe, but there is a better way to store it instead of idle cash.

Invest in a non-cyclical company like Fortis (TSX:FTS)NYSE:FTS). The stock can not only help you keep your money safe. It can grow your funds through capital gains and reliable dividend payouts. Fortis is a utility sector operator that provides an essential service to Canadians. No matter how bad the economy gets, people will still require electricity and gas.

Fortis can continue generating income to fund its 3.62% dividend yield. At writing, the company is up 25% from its March 2020 bottom. It is still trading at a discount from its pre-pandemic share prices. At $52.78 per share, Fortis still has room to grow before it returns to prices before the pandemic.

Foolish takeaway

Allocating your funds to a non-cyclical stock like Fortis can help you grow your funds in reliable equity. If the housing market crashes, you can use the funds to buy real estate at a bargain. If the market correction is not significant or does not materialize, you can continue to grow your wealth through its dividends.


Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.

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The Pandemic is Changing Life Sciences Real Estate – GlobeSt.com

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As other segments of the economy have suffered in 2020, life sciences are emerging as a bright spot. 

Private investors have put more than $16 billion to work in life sciences in the first half of 2020, while the National Institutes of Health continues to up its grant volume. In 1994, NIH gave out $11 billion in grants. By 2019, that number jumped to $39.1 billion, JLL’s Life Sciences practice Global Leader Roger Humphrey wrote for NAIOP

The pursuit of COVID-19-related therapeutics, antibody tests and a vaccine contributed to this increase in funding. But it wasn’t the entire story, according to Humphrey. An aging US population needing life-sustaining and life-extending care, wellness-conscious millennials and a prescription drug market on track to reach $1 trillion by 2022 also drove this market. 

To secure funding, Humphrey writes that life sciences companies must create a work environment that encourages innovation and productivity while remaining flexible to meet new and evolving demands. 

As these firms need to remain flexible, they’re adopting more technology, such as machine learning and artificial intelligence. 

“That means a growing portion of today’s lab looks more like a traditional office, even if its operational systems are far more sophisticated,” Humphrey writes.

While computers and the internet have allowed many office workers to work remotely, Humphrey writes that life sciences companies still brought workers into labs. They are incorporating staggered shifts and social distancing to keep their work on track. Many administrative staffers at these companies are working from home.

“Flexible lab space that can adjust to a variety of work tasks with limited downtime will be critical, along with ‘free’ space that can be called on to meet changing industry conditions,” Humphrey writes.

The locations of this space could be changing, though. Boston, San Francisco and San Diego secured up to 70% of venture capital investments in 2019. While these locales offer proximity to a highly educated workforce and ties to leading research institutions, Humphrey reports some companies are starting to look to secondary markets to cut costs. He writes that these secondary markets include Maryland, North Carolina’s Research Triangle, Philadelphia, New York and Los Angeles.

Others agree that high costs are creating new life science hubs. “Major metropolitan cities like Boston, San Francisco, Seattle and San Diego that have been long-established life science hubs are expensive to operate in,” Mark Hefner, CEO and shareholder of MGO Realty Advisors told GlobeSt. in an earlier interview

 “Everything from real estate to cost of living in these cities is expensive. Now, with the Covid-19 crisis, companies are facing tremendous budget constraints and increasing pressures on their bottom line, forcing them to reconsider where they are located.”

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Moody’s Doubles Down On Forecast of Canadian Real Estate Prices Falling Soon – Better Dwelling

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One of the world’s largest credit rating agencies doubled down on its Canadian home price forecast. Moody’s Analytics sent clients its September update on Canadian real estate prices. The forecast reiterates they expect price declines to begin towards the end of this year. The report also names impacted cities this time, with Toronto expected to be a leader lower.

Forecast Vintages 

A quick note on reading Moody’s charts, which includes “forecast vintages.” If you’ve only looked at consumer forecasts, these might be new. They’re scenarios that vary depending on the forecasting model’s inputs. Instead of giving a forecast like, “prices will drop x%,” they give a range based on factors. These factors are fundamentals that have typically supported prices. 

The Moody’s forecast shows vintages as baseline, S1, S3, and S4. The September baseline is the scenario they believe has the highest probability. The S1 is what happens if indicators are better than expected. This would mean unemployment drops fast, and disposable income doesn’t fall much. The S3 is what happens if fundamentals are worse than expected. S4 is the worst scenario that can unfold in a reasonable amount of time. Abrupt scenarios and black swans can still be worse. It’s just those are outside of the range of reasonable expectations.

Canadian Real Estate Markets To Start Showing Weaknesses Soon

Moody’s previous forecast didn’t expect the market to show signs of weakness until Q3, and they’re doubling down. The report’s economist expects stimulus, mortgage deferrals, and interest rates to contain damage until Q3. They expect by Q3, the optimism of those programs will begin to wear thin. The reality of how meaningful the improvements are, should be apparent by then. The optimism should then fade. It’s at this point they believe prices can no longer defy employment, vacancy, and delinquency rates.

Canadian Real Estate Prices To Drop Around 7%

The firm expects all scenarios to show a drop in the near future, but how much depends on fundamentals. In the September baseline, the firm’s economist is forecasting a ~7% decline at the national level. This scenario expects unemployment at 8.56%, and a 2% drop of disposable income next year. Since the rise in disposable income was due to temporary supports, the fall is expected.

In the other scenarios, things vary from a brief drop to a very deep, multi-year decline. In the S1 scenario, there’s only a brief dip in Q1, before prices rocket even faster and higher. In S3, a slightly worse than base case, prices fall about 15%, taking them back to 2016 levels. In S4, if disposable income, GDP, and/or unemployment worsen,  prices drop about 22%, back to 2015 levels. Of course, this trend isn’t evenly distributed across Canada. However, it’s also not distributed how most might expect. 

Prairie Cities and Toronto Real Estate To Lead The Declines

The base case sees Prairie cities and Toronto real estate leading price declines. Calgary, Edmonton, and Regina lead the drop, with a peak-to-trough decline between 9 to 10%. This is a trend already apparent in the regions’ condo markets. Toronto, a little more unexpected, is forecasted to see a 9% price drop, from peak to trough. Vancouver’s drop is forecasted below the national average, with an average decline of almost 7%. The last market is interesting, since other organizations gave Vancouver much worse forecasts.

Toronto Real Estate To Experience Uneven Declines Across Regions

The base case for Toronto expects an uneven decline, with some regions harder hit. The drop across Toronto CMA is expected to be about 9%, from peak to trough. Pickering should see smaller declines, but experience minimal growth through 2025. Markham is the most surprising though, not expected to hit 2017 highs by 2025. The trend here appears to be regions short on space will recover the fastest. Although that is likely to depend on the type of housing as well.

The forecast notes pandemic uncertainty, and its potential to bring greater downside. As it gets colder, the potential of more indoor activity may lead to a second wave. The report’s economist believes this can bring even larger declines to prices. Shifting consumer behavior is also a wild card that can also push prices lower, as are any vaccine delays.

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Will development remain key growth strategy for REITs? | RENX – Real Estate News EXchange

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IMAGE: Transit City Condos, being developed by a JV led by SmartCentres REIT, at the Vaughan Metropolitan Centre just outside Toronto. Development and intensification have been key growth strategies during the past decade for Canadian REITs. (Rendering courtesy SmartCentres)

Transit City Condos, being developed by a JV led by SmartCentres REIT, at the Vaughan Metropolitan Centre just outside Toronto. Development and intensification have been key growth strategies during the past decade for Canadian REITs. (Rendering courtesy SmartCentres)

Development has been a key growth strategy for many real estate investment trusts over the past decade, but will that continue during the next 10 years?

That was the theme of a five-person panel moderated by Lincluden Investment Management real estate equities vice-president and portfolio manager Derek Warren on Sept. 23, as part of RealREIT.

“There has been some dislocation in the short-term operating metrics,” CIBC World Markets REIT analyst Dean Wilkinson said. “I think the question we’re all struggling with is: Is this a permanent structural shift in a downward direction with the underlying fundamentals of the real estate, or have we overshot?“

“Projects are getting bigger and more complex, and we’re seeing a lot of mixed-use,” said Altus Group cost and project management senior director Marlon Bray, who noted he’s being inundated with proposals. “I’ve got people sending me six, eight, 10 projects to look at in the space of two or three weeks.

“They’re looking long-term at pipelines and thinking of the future and not just what’s going to happen tomorrow.”

Transit-oriented and mixed-use development

Immigration has slowed considerably during the pandemic, but it’s starting to rise again and those people will need places to live and work.

While public transit ridership has decreased during the COVID-19 pandemic, SmartCentres REIT (SRU-UN-T) development VP Christine Côté said transit-oriented development is still desirable and should remain a focus for REITs and all levels of government.

Dream Unlimited (DRM-T) chief development officer Daniel Marinovic said a lot of critical transit infrastructure work began in the Greater Toronto Area in 2008 and, while it will be ongoing for years to come, he believes it’s a “phenomenal” long-term investment.

“I’ll continue to be a big believer in density,” said Marinovic.

Allied Properties REIT (AP-UN-T) executive VP of development Hugh Clark remains a strong advocate of the “live, work and play” concept and believes it will continue to prosper. He said mixed-use projects need amenities to help people socialize.

Grocery stores, restaurants and services and amenities catering to the daily needs of the local community will become more important additions within residential buildings, according to Côté.

“We feel strongly that value-oriented retail will continue to be strong,” she said.

Development costs

Construction costs levelled off from April through June, but have ramped back up due to supply and demand factors.

Bray attributes some of the increase to the 7,000 condominium units and 10,000 rental units under construction in the Greater Toronto Area, more than double the numbers from 10 years ago.

Bray pointed out construction costs comprise less than 50 per cent of residential development expenses.

Land can account for as much as 30 per cent, while development charges and taxes are also major costs. Development charges have increased by multiples and are always changing and hard to predict, said Bray.

Wilkinson said the saving grace over the last several years is that rent increases have “probably gone at, or at a level higher than, the inflation surrounding those construction costs. But if the script gets flipped and it goes the other way, what could happen?”

Specific issues for REITs

No more than 15 per cent of a Canadian REIT’s funds are generally allowed to be spent on development, which Wilkinson said is lower than in other countries.

The potential build-out for some Canadian REITs, particularly those with retail sites with inherent density, is larger than their current gross leasable area.

Wilkinson added that development activity isn’t included in the underlying value of a company until a building is finished. Thus, a short-term construction expenditure is a diluted effort because capital is put into something that’s not creating immediate cash flow.

There’s an increase in NAV after the completion of projects, but the public market is still focused on quarterly results instead of longer-term cycles, according to Wilkinson.

As a result, Allied is taking a prudent, market-driven approach to development and isn’t looking to expand just because it can.

Clark said the REIT may slow the launch of new projects and ensure it hits certain pre-leasing requirements before starting construction so it doesn’t put itself in a “position of strain.”

Returns for REITs are getting smaller

Clark said it’s “getting harder and harder to make some big gains, with eight or nine or 10 per cent returns on investment.” While it’s possible with some high-priced condos, those are few and far between.

Clark thinks REITs will be lucky to keep a 100- to 150-basis point spread going forward. A development yield of 150 basis points over the acquisition cap rate is much lower than the 400- or 500-point spreads of the past, Wilkinson added.

The convergence between the two figures could mean the elimination of compensation for development risk, so developers may have to start looking more closely at portfolio quality versus straight economic accretion.

“There’s value to that, but it remains to be seen how the market wants to treat that,” said Wilkinson.

Apartment rents have sagged recently due to the COVID-19 pandemic, and Wilkinson said there are concerns market rents may be just 10 per cent higher than in-place rents when apartments being built now are completed.

“The premium that was afforded to a lot of the apartment REITs was really based upon the fact that their in-place rents were 20 to 25 per cent below what was deemed to be market rent. So, they were trading at 20 to 25 per cent premiums to NAV.”

SmartCentres REIT

Côté has been with SmartCentres for 17 years, and her focus in that time has changed from building Walmarts and shopping centres to intensifying existing properties across Ontario.

“We’ve got countless master plans that are in place now and we are preparing, submitting and processing development applications for those initial phases of redevelopment across the portfolio,” she said.

SmartCentres has made applications for more than 20 development projects since the onset of COVID-19 and will submit another 20 over the next six months, according to Côté.

The REIT has more than 40 million square feet of density planned, mainly on sites it already owns, and has a long-term plan for much more than that.

Côté said SmartCentres is taking more time with new building design to increase efficiencies and make them more economical.

Despite the recent softness in rents, Côté doesn’t think the REIT’s planned purpose-built rental apartments will be switched to condos.

She believes the market will be past its short-term challenges by the time those buildings are ready for occupancy.

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