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Open-end real estate funds open up – REMI Network – Real Estate Management Industry Network



Open-end real estate funds wield considerable clout in the Canadian investment landscape. Recently released results of REALPAC’s inaugural open-end fund survey show that 15 funds, under the auspices of 13 organizations, collectively held more than CAD $143.1 billion in assets under management at the end of 2018. That compares to a market cap of CAD $112.7 billion for TSX-listed real estate companies on the same date and CAD $40 billion in assets under management reported by 22 participants representing 50 funds in REALPAC’s 2018 non-listed closed-end fund survey.

“REALPAC’s continued commitment to transparency and professionalism in the real estate investment market has informed its decision to undertake the 2019 open-end fund survey to build on the market information obtained from its closed-end fund surveys over the last three years,” states accompanying commentary from the organization representing many of Canada’s largest real estate companies, funds and institutional investors.

The defining features of open-end funds — private investment vehicles that typically hold long-maturity income-generating assets and allow for contributions and withdrawals on an ongoing basis — are well matched to investors with long-term needs for stable, predictable returns. In contrast, closed-end funds have a specific investment period, set timelines for distributing all cash flows, and typically a higher proportion of value-added assets — all making for a more volatile mix that can yield impressive or more disappointing payouts depending on market conditions on the termination date.

Seven of the surveyed open-end funds report net asset value (NAV) in excess of $1 billion, with highest NAV surpassing $6 billion. A NAV of $16-million bottoms out the scale, but it falls well below four funds reporting NAV in the $251- to $500-million range at the next rung up.

Data collected between August and late November last year reveals open-fund contributors heavily weighted to institutional investors with fund managers generally favouring multiple asset classes, but more wedded to core strategy — based on stabilized, fully-leased income-producing assets — than their peers overseeing closed-end funds. While one fund reported a predominantly non-core focus in excess of 90 per cent of investment, the greater majority — 13 of 15 — have core investment in the 76 to 100 per cent range.

“It’s not surprising that a core strategy is employed by a majority of the open-end funds because of the stability of the assets, which provide reliable cash flow and better liquidity for investors,” the survey commentary notes.

Other distinguishing differences emerging from REALPAC’s two-track surveys include: open-end funds’ greater propensity to invest outside North America, with 55 per cent of investment allocation in Europe compared to a European stake in the 24 per cent range for closed-end funds; and a lesser reliance on leverage, with most funds setting a maximum threshold in the 31 to 40 per cent range versus the majority of closed-end funds with maximum thresholds between 51 and 75 per cent.

Open-end fund managers can also typically draw on a long record of deal-making. Five funds report they have made between 51 and 75 investments; two have made between 76 and 100 investments; and three have made more than 100 investments.

“With the characteristic of open-end funds being long-term vehicles and the fact that some of the participating funds are a few decades old, it is not surprising that the number of investments made fall on the higher end of the scale,” the commentary notes.

Fund managers typically steer the interests of a greater number of investors than in a closed-fund scenario. Eight of 15 surveyed funds tallied more than 100 investors, with the largest pool topping out at 1,662. Six other funds reported between 11 and 75 investors, while just one fund counted fewer than 10.

Corporate pension funds were the most predominant investor type — represented in eight of the 15 funds, with a contribution stake ranging from 4 per cent to 63 per cent across those funds. In most cases, though, corporate pension contributions equated to less than 50 per cent of investment.

Public pension funds were the sole investor type in three of the funds, while contributing to a total of seven of the funds at levels ranging from 100 per cent to 4 per cent. Endowments and foundations were also active investors, represented in seven funds but with a contribution stake below 50 per cent in six of those cases.

Insurance companies, funds of funds, direct contribution pensions, investment banks and fund managers themselves add to the institutional investor mix, along with the assorted “other” category, defined as “high-net-worth investors, corporations, foreign charity, trusts, group retirement solution platforms and general institutional investors”.

Meanwhile, retail investors figured in six of the funds, at levels ranging from 95 per cent to 0.3 per cent. Although only three of the 15 funds report any foreign capital investment, one of those is 100 per cent subscribed by foreign investors.

Nine of the surveyed funds are targeting new development, which is generally in sync with sector-wide trends. MSCI’s historical overview shows development as a growing component of capital value across the Canada Property Fund Index over the past decade, hitting a high of 9.5 per cent in 2019, up from a low of 3.9 per cent in 2012.

Five funds appear to be sticking in that range with targets of five to 10 per cent, while the remainder are poised more aggressively, including three with targets in 16 to 20 per cent range. That aligns with challenges fund managers report facing, including “the competitive landscape for product, which results in a challenge to find institutional grade real estate in Canada.”

Currently within Canada, Ontario, British Columbia, Alberta and Quebec capture the vast share of open-end fund investing, which is largely directed to the industrial, office, retail and multi-residential asset classes. All 15 funds report holdings in Alberta, but more investment occurs in Ontario and British Columbia despite the slightly lower participation of 14 funds. Notably, 11 funds hold upwards of 40 per cent of their portfolio in Ontario, while no fund has a similarly sized share in Alberta.

Outside the big four, Atlantic and prairie provinces host a modest level of fund activity. Nova Scotia tallies the highest number — five — while New Brunswick receives the highest level of investment from any one fund, at 12 per cent. Open-end funds are entirely absent from Prince Edward Island, Yukon, Northwest Territories and Nunavut.

Funds show varying commitments to the four predominant asset classes, but office and industrial capture both the highest number of investors and the largest share of their investment. Fourteen of 15 funds channel 86 per cent to 3.8 per cent of total investment into industrial properties. Thirteen of 15 funds invest in office, with allocations ranging from 71 per cent to 15.3 per cent of their total investment.

Land, hotels and seniors residential projects make up a tiny fraction of a minority of open-end funds’ holdings. There is no investment in student housing.

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Former B.C. Realtor has licence cancelled, $130K in penalties for role in mortgage fraud



The provincial regulator responsible for policing B.C.’s real estate industry has ordered a former Realtor to pay $130,000 and cancelled her licence after determining that she committed a variety of professional misconduct.

Rashin Rohani surrendered her licence in December 2023, but the BC Financial Services Authority’s chief hearing officer Andrew Pendray determined that it should nevertheless be cancelled as a signal to other licensees that “repetitive participation in deceptive schemes” will result in “significant” punishment.

He also ordered her to pay a $40,000 administrative penalty and $90,000 in enforcement expenses. Pendray explained his rationale for the penalties in a sanctions decision issued on May 17. The decision was published on the BCFSA website Wednesday.

Rohani’s misconduct occurred over a period of several years, and came in two distinct flavours, according to the decision.

Pendray found she had submitted mortgage applications for five different properties that she either owned or was purchasing, providing falsified income information on each one.

Each of these applications was submitted using a person referred to in the decision as “Individual 1” as a mortgage broker. Individual 1 was not a registered mortgage broker and – by the later applications – Rohani either knew or ought to have known this was the case, according to the decision.

All of that constituted “conduct unbecoming” under B.C.’s Real Estate Services Act, Pendray concluded.

Separately, Rohani also referred six clients to Individual 1 when she knew or ought to have known he wasn’t a registered mortgage broker, and she received or anticipated receiving a referral fee from Individual 1 for doing so, according to the decision. Rohani did not disclose this financial interest in the referrals to her clients.

Pendray found all of that to constitute professional misconduct under the act.

‘Deceptive’ scheme

The penalties the chief hearing officer chose to impose for this behaviour were less severe than those sought by the BCFSA in the case, but more significant than those Rohani argued she should face.

Rohani submitted that the appropriate penalty for her conduct would be a six-month licence suspension or a $15,000 discipline penalty, plus $20,000 in enforcement expenses.

For its part, the BCFSA asked Pendray to cancel Rohani’s licence and impose a $100,000 discipline penalty plus more than $116,000 in enforcement expenses.

Pendray’s ultimate decision to cancel the licence and impose penalties and expenses totalling $130,000 reflected his assessment of the severity of Rohani’s misconduct.

Unlike other cases referenced by the parties in their submissions, Rohani’s misconduct was not limited to a single transaction involving falsified documents or a series of such transactions during a brief period of time, according to the decision.

“Rather, in this case Ms. Rohani repetitively, over the course of a number of years, elected to personally participate in a deceptive mortgage application scheme for her own benefit, and subsequently, arranged for her clients to participate in the same deceptive mortgage application scheme,” the decision reads.

Pendray further noted that, although Rohani had been licensed for “a significant period of time,” she had only completed a small handful of transactions, according to records from her brokerage.

There were just six transactions on which her brokerage recorded earnings for her between December 2015 and February 2020, according to the decision. Of those six, four were transactions that were found to have involved misconduct or conduct unbecoming.

“In sum, Ms. Rohani’s minimal participation in the real estate industry as a licensee has, for the majority of that minimal participation, involved her engaging in conduct unbecoming involving deceptive practices and professional misconduct,” the decision reads.

According to the decision, Rohani must pay the $40,000 discipline penalty within 90 days of the date it was issued.



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Should you wait to buy or sell your home?



The Bank of Canada is expected to announce its key interest rate decision in less than two weeks. Last month, the bank lowered its key interest rate to 4.7 per cent, marking its first rate cut since March 2020.

CTV Morning Live asked Jason Pilon, broker of Record Pilon Group, whether now is the right time to buy or sell your home.

When it comes to the next interest rate announcement, Pilon says the bank might either lower it further, or just keep it as is.

“The best case scenario we’re seeing is obviously a quarter point. I think more just because of the job numbers that just came out, I think more people are just leading on the fact that they probably just gonna do it in September,” he said. “Either way, what we saw in June, didn’t make a big difference.”

Here are the pros of buying/ selling now:

Pilon suggests locking in the rate right now, if you don’t want to take a risk with interest rates going up in the future.

He says the environment is more predictable right now, noting that the home values are transparent, which is one of the benefits for home sellers.

“Do you want to risk looking at what that looks like down the road? Or do you want to have the comfort in knowing what your house is worth right now?” Pilon said.

And when it comes to buyers, he notes, the competition is not so fierce right now, noting that there are options to choose from.

“You’re in the driver seat right now,” he said while noting the benefits for buyers.

Here are the cons of buying/ selling now:

He says one of the cons would be locking in the rate right now, then seeing a rate cut in the future.

The competition could potentially become fierce, if the bank decides to cut the rate further more, he explained.

He notes that if that happens, the housing crisis will become even worse, as Canada is still dealing with low housing inventory.

An increase in competition would increase the prices of houses, he adds.

Selling or buying too quickly isn’t the best practice, he notes, suggesting that you should take your time and put some thought into it.

Despite all the pros and cons, Pilon says, real estate remains a good investment.

According to the latest Royal LePage House Price Survey for the second quarter of this year, the average home price in Canada is $824,300. That’s up 1.9 per cent from the same time last year, and up 1.5 per cent from the first quarter of 2024.

In the Ottawa Housing Market Report for June 2024, the average price of a home was up 2.4 per cent from this time last year to $686,535, but down 0.6 per cent from May 2024.

Experts believe many potential buyers are still hesitant of jumping into the housing market and waiting for another interest rate cut of 50 to 100 basis points.

“I don’t think it’s going to be the rush that we see in the past, because people are used to more of a conservative approach right now,” said Curtis Fillier, president of the Ottawa Real Estate Board. “I think there’s still a bit of a hold back, but I definitely do think with another rate cut, we’ll probably see a very positive fall market.”

With files from CTV News Ottawa’s Kimberly Fowler



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Real estate stocks soar to best day of year on rate cut bets



(Bloomberg) — The stock market’s worst group notched its best day of the year as a cooler-than-expected inflation report stoked bets that the Federal Reserve will start cutting interest rates in September.

Shares of real estate companies jumped 2.7% Thursday for their biggest gain of 2024, climbing to their highest level since March as investors snapped up homebuilder, digital and commercial real estate stocks alike. Real estate also was the best-performing group in the S&P 500 Index Thursday, with volume that was around 30% higher than the 30-day average, according to data compiled by Bloomberg.

Arguably the most significant news to come from the latest consumer price index reading was a pullback in housing-related inflation. Shelter costs rose just 0.2% for the slowest monthly increase in three years. Homebuilders, which have risen 7.1% this year, were up 7.3% for the session, the most since 2022. Shares of D.R. Horton Inc., which is scheduled to report earnings next Thursday, gained 7.3%.

“Housing has really been the last shoe to drop in terms of winning the battle against high inflation,” Preston Caldwell, chief U.S. economist at Morningstar wrote in a note to clients Thursday. “Leading-edge data has strongly indicated for some time now that a fall in housing inflation was in the works.”

A rally in real estate stocks is bad news for short sellers who have been piling into the group, which is the worst performer in the S&P 500 this year. To start the week, short interest as a percentage of float hovered near 49% in the SPDR Homebuilders ETF, the highest level since February for the exchange-traded fund, according to data from S3 Partners.

Property owners are rallying as well. Real estate investment trusts, which were brutally penalized during the two-year run up in borrowing costs, advanced by as much as 3%. And the outlook for the group appears to have turned a corner, according Rich Hill, senior vice president and head of real estate strategy and research at Cohen & Steers Capital Management.

“We think this is a compelling backdrop for listed REITs especially as fundamental growth remains on solid footing,” he said, referencing the latest inflation data and rate outlook. “The rally that started in October of 2023 pushing returns more than 20% above their trough looks set to continue if inflation cools and interest rates continue to decline.”

Shares of industrial REIT Prologis Inc., which reports second-quarter results on Wednesday, rose 3.3% to hit their highest level since April. U.S. Treasury yields tumbled, with the 10-year bond falling to 4.2% and the policy-sensitive two-year note slipping to 4.5%.

(Updates indexes and stock prices for market close.)



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