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No housing crash on the horizon – Advisor's Edge

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Amid skyrocketing investor demand and people’s fear of missing out (or FOMO) on real estate, what occurred was unprecedented: “We [had] never seen houses out-earn people, but we did. And that has set us up for where we are today,” Rabidoux said.

The medium-term picture so far isn’t entirely clear, he conceded, but Rabidoux doesn’t expect a housing crash. While home sales across Canada have declined by more than 40% in 2022 and active listings  have been weak as well, he noted that the plunge is from “peak levels.”

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Further, “The declines [in real estate activity] are exaggerated,” in part due to distressed sales — where homeowners have been forced to sell in a weak market — and those transactions are “working themselves through the system.”

Rather than home prices bottoming, Rabidoux said they’re slipping “back to decade averages.” Demand is “very low” and “has to bounce,” he added, especially if inventory levels keep recovering as they began to in early 2022. Still, new home listings would have to rise almost 50% and reach pre-Covid levels for there to be true oversupply dangers, he explained.

So what we’re really seeing currently is “an interest rate story” where the fear of being burned by real estate is weighing on demand in the short term and overshadowing that FOMO that emerged, Rabidoux said.

But there are risks to watch out for, given the sizeable chunk of GDP activity that real estate has assumed.

First, Rabidoux highlighted what he deemed “a record gap” between residential investment and business investment, noting that “housing is sucking capital from productive investments” that could actually help build the economy. In particular,  real estate transfer costs are “triple the long-term average (being around that 3% level), so have become “nearly as large as core business investment.”

On top of that, there’s the massive affordability issue for clients in the face of rising interest rates and, thus, mortgage payments — weighing on their ability to consume and prop up the economy.

“Canadian households are extremely levered,” Rabidoux indicated, “and not just by our own historical standards.” The household effective interest rate is sitting at heights last seen in the 1990s, substantially affecting “even borrowers on five-year fixed mortgages.”

So how can advisors guide clients? With discretionary spending in for a pinch, cash flow analysis is of great value, as is taking a look at how, according to Rabidoux, people’s balance sheets are “more exposed to housing than ever.”

With housing weakness set “to break stuff” and there being “nowhere to hide from interest rates,” Rabidoux said to expect possible economic retraction of 1%. (An outlook session also from the IAFP symposium that was led by Pierre Cléroux, vice-president of research and chief economist at Montreal-based BDC, similarly suggested downside risk of a 1% decline for 2023, with an upside of 1% growth.)

Investors will need to brace for medium-term pain as the economy resets, will likely end of up paying more on their existing homes than expected and will need support with the psychological effect of perceived loss of value in their real estate investments.

On the upside, he added, while there could be a rise in consumer insolvencies from current levels, he suggests that “credit trends look very good for now.”

A piece of advice was it’s likely “not a good time to buy big-ticket items,” where investors will lean on savings amassed throughout the pandemic to ride the inflation, interest-rate and market volatility wave.

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Sale of $37M property could be biggest residential real estate deal in Kelowna history – iNFOnews

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This is the view many residents could have if this property sells and has housing built on it.

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This is the view many residents could have if this property sells and has housing built on it.

Image Credit: Submitted/ForSalebyOwner.ca

A 90-acre parcel of land in the Rutland area of Kelowna has gone on the market for $37 million.

It’s not listed through any realtor but is posted on the For Sale by Owner Inc. website.

It’s 90.19 acres at 1151 McKenzie Rd., which is north of the Toovey Road subdivision and west of the Black Mountain Golf Course.

The land went on the market two to three weeks ago, according to the owners’ lawyer, Crystal Wariach.

“Over 90 acres of Kelowna’s finest future development land with spectacular panoramic views of the lake and city lights,” the real estate listing says.

The land is not in the agricultural land reserve and is designated for housing.

This outlines the property.

This outlines the property.

Image Credit: Submitted/ForSalebyOwner.ca

In 2019, when city council was looking at various growth scenarios, Wariach emailed councillors on behalf of the owners (cited as Balbir Wariache and Mrs. Prem Wariache).

She asked that this parcel retain is designation as future housing, which is what happened.

“Over the past two years, my clients have had professional development plans created for the property,” she wrote. “The plans provide for the build out of up to 320 lots for single-family homes on the property.”

The owners bought the property in 1999 and continue to own it, Wariach confirmed.

She wasn’t able to confirm, by publication time, whether development options had changed from the 320 lots envisioned in 2019.

The land is included in the Bell Mountain Area Structure Plan that was adopted by council in 2003.

Most of the land within that plan has been developed into single-family housing in subdivisions such as Blue Sky, Prospect Mountain and Lone Pine Estates, Wariach’s 2019 email says.

The largest sale through the MLS listing service that has been publicized to date was announced in January 2021 when the Kirschner Mountain housing development sold for $22 million.

It included 190 acres of land left from a larger parcel that was part of the Kirschner Mountain housing development.

READ MORE: Sale of Kirschner Mountain for $22 million makes Okanagan history

If the McKenzie Avenue property sells for $37 million it will eclipse that sale in terms of residential property sold through the MLS system in the city.

Since the Kirschner Mountain sale, there have been bigger real estate deals in Kelowna.

Last December, the Mission Group paid $24 million for the former B.C. Tree Fruits plant near the North End of downtown.

READ MORE: $24M sale of Kelowna waterfront property will trigger hundreds of millions in economic impact

Earlier this year, Victor Projects spent $33 million to buy the former Costco site near the Highway 33 and Highway 97 intersection.

The McKenzie Road listing can be seen here and Wariach can be contacted by email at cwariach@outlook.com.


To contact a reporter for this story, email Rob Munro or call 250-808-0143 or email the editor. You can also submitphotos, videos or news tips to the newsroom and be entered to win a monthly prize draw.

We welcome your comments and opinions on our stories but play nice. We won’t censor or delete comments unless they contain off-topic statements or links, unnecessary vulgarity, false facts, spam or obviously fake profiles. If you have any concerns about what you see in comments, email the editor in the link above. 

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An ETF to Consider While Investors Pick Up Distressed China Real Estate

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Investors are giving the China real estate market a second look as the country continues to work through the real estate doldrums brought on by last year’s Evergrande Crisis. As such, this opens up opportunities for exchange traded funds (ETFs) that get exposure to Chinese real estate.

It’s often said in the investment world to follow the “smart money.” That could mean tailing the bets of institutional money managers such as Brookfield Asset Management, which is looking at opportunities in distressed Chinese real estate.

Per a South China Morning Post article, “Brookfield Asset Management is on the lookout to acquire premium commercial property from distressed Chinese developers, aiming to increase its footprint in the world’s second-largest economy where fresh capital is needed to bail out the troubled real estate sector.” Based on the report, the Canadian firm is targeting properties in specific cities with the probability of generating returns in the long run.

“We are seeing opportunities and are pursuing lucrative deals,” said Yang Yiwen, senior vice-president of real estate portfolio management for Brookfield in China. “There will be drawn-out negotiations because of pricing gaps to close.”

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As mentioned, the value stems from last year’s Evergrande Crisis, which saw a number of large real estate developers come close to defaulting on their loans. This prompted them to sell real estate such as commercial buildings at low prices in China’s prime locales, giving real estate investors plenty of opportunities to snatch up property at a bargain.

An ETF to Play the Real Estate Bounce

ETF investors looking to play a rebound in China’s real estate market can obtain exposure using the Global X MSCI China Real Estate ETF (CHIR). CHIR seeks to provide investment results that generally correspond to the price and yield performance, before fees and expenses, of the MSCI China Real Estate 10/50 Index.

The underlying index tracks the performance of companies in the MSCI China Index (the “parent index”) classified in the real estate sector, as defined by the index provider. Summarily, ETF investors get the following:

  • Targeted exposure: CHIR is a targeted play on the real estate sector in China — the world’s second-largest economy by GDP.
  • ETF efficiency: In a single trade, CHIR delivers access to dozens of real estate companies within the MSCI China Index, providing investors with an efficient vehicle to express a sector view on China.
  • All share exposure: The index incorporates all eligible securities as per MSCI’s Global Investable Market Index Methodology, including China A, B, and H shares, red chips, P chips, and foreign listings, among others.

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A look back, and ahead, at Canada’s commercial real estate landscape

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MSCI head of real estate economics Jim Costello and LaSalle Investment Management global strategist Jacques Gordon, speaking at the Global Property Market conference in Toronto.. (Steve McLean RENX)
MSCI head of real estate economics Jim Costello (right) and LaSalle Investment Management global strategist Jacques Gordon, speaking at the Global Property Market conference in Toronto.. (Steve McLean RENX)

This year’s Global Property Market conference opened with presentations which looked both forward and back . . .  reviewing the major trends of 2022 and offering an investment outlook for 2023.

Following are snapshots of what MSCI head of real estate economics Jim Costello and LaSalle Investment Management global strategist Jacques Gordon had to say during their talks at the Nov. 29 event at the Metro Toronto Convention Centre.

MSCI is a New York City-headquartered provider of decision support tools and services for the global investment community and Costello has 30 years of experience analyzing the relationships between real estate and economics.

LaSalle is a global real estate money manager with more than $81 billion in assets under management.

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Gordon has been responsible for the macro strategy and micro research used to guide all investment decisions in 30 countries, but will soon take a new role as executive in residence at the Massachusetts Institute of Technology Center for Real Estate.

Jim Costello, MSCI

Costello said the real estate industry has enjoyed a period of tremendous returns globally and in Canada, but that dropped significantly in Q3 and major challenges remain ahead.

The global volume of real estate deals valued at more than $10 million is down from last year, when there was an enormous flow of capital into the sector. It is still, however, at an elevated level compared to historic deal flows.

“It was just a lot of folks hungry for yield in a period when interest rates were exceptionally low,” Costello said. “But as rates reset, there are going to be challenges for some of those investments.”

Many of the deals being done were larger as smaller assets that were traditionally purchased by investors with limited pools of capital behind them stopped moving earlier.

Liquidity fell in 97 of 155 global markets in the third quarter and Costello doesn’t see it picking up again for a while.

New York City was the most liquid market in the world from 2017 to 2020, but the Australian city of Sydney now holds that title.

Larger gaps have been created between buyer and seller price expectations. Costello said price corrections are needed to drive U.S office liquidity.

He believes sellers need to cut their price expectations by 15 per cent to get deals done and that number could increase.

Deal activity was down in Q3 in every asset class and the most popular markets have also changed.

Instead of traditional front-runners New York City and London, Los Angeles and Dallas have become the top global markets owing to their large number of logistics facilities and apartment buildings — two asset classes investors continue to chase.

Alternative real estate sectors — including self-storage, data centres, medical office, research and development, manufactured housing, student housing and seniors housing — have been gaining ground on more traditional asset classes.

Jacques Gordon, LaSalle Investment Management

Gordon said there were four inflection points affecting global economies and real estate in the transition from 2022 to 2023 and beyond. Things are moving:

•    from interest rates being lower for longer to higher rates with a heavier drag on cash flows;
•    from a COVID rebound to a global stall;
•    from upward price pressure to downward price pressure; and
•    from fossil fuel-driven economies to renewable energy-driven economies.

“Most of us are in private equity real estate,” Gordon said in talking about interest rates. “Whether we’re debt or equity players, we’re putting money to work for multiple years at a time.

“When you do that, you realize that we’re going to have to endure this period of, probably, 12 to 18 months of higher inflation and higher interest rates, but this too shall pass.”

Gordon said the COVID-19 pandemic “blasted a hole in the global economy” in 2020, but last year there was a “supercharged rebound with governments just blasting out surplus money.”

However, gross domestic product (GDP) numbers in countries around the world have been well below expectations in 2022.

Oxford Economics’ GDP forecasts for next year aren’t good, with several countries (including Canada) expected to have negative growth.

Real estate experienced major upward price pressure through 2021 and the first part of 2022, but now investors are having to deal with downward price pressure and declining transaction volumes in the sector.

Gordon said the depth of buyer pools has retreated across property types and, although deals can still get done, there are fewer bids for properties and sellers often don’t want to accept them.

Office vacancy rates are on the rise. JLL figures show a global vacancy rate of 14.5 per cent, with Europe at 7.2 per cent, Asia Pacific at 14.1 per cent and the U.S. at 19.1 per cent in the third quarter.

Coal, oil and gas comprise 77 per cent of the global primary energy mix, but Gordon said the future of energy looks nothing like its past.

He believes it’s going to take a lot of hard work to reduce the reliance on fossil fuels and shift toward more environmentally friendly energy.

“We in this room can commit to a net-zero-carbon world, but we need the rest of the world to come with us,” Gordon said. “Otherwise, we won’t get there.”

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