In 2018, Bank of Montreal backed investors who paid $173-million for a property at the corner of two busy Vancouver streets. Last July, the owners stopped making interest payments, and in January, BMO put the project into receivership.CHRIS WATTIE/Reuters
Bank of Montreal BMO-T is caught up in a messy battle over the future of a planned 55-storey condominium tower in downtown Vancouver.
At first glance, it’s a fight that feeds fears of a meltdown in all the big banks’ commercial real estate loan portfolios. BMO backed a flashy development that’s now worth far less than the $169-million of debt the project accumulated over the past five years.
Dig a little deeper into British Columbia court filings, and it becomes clear BMO is willing and able to do what it takes to ensure the bank gets repaid, in full, on a bad loan. That’s consistent with what analysts are now saying about all the banks: In all but the worst case scenarios, losses on real estate lending will be manageable, and far lower than what’s currently forecast.
BMO’s problem loan in Vancouver is a case study for what’s playing out on office, retail and residential projects across the country.
In 2018, with interest rates low and condo construction booming, BMO backed investors who paid $173-million for a property at the corner of two busy Vancouver streets: Haro and Thurlow. Their plans to build a 516-unit development got hung up at city council, in part over concerns the tower will block mountain views. Last July, the owners stopped making interest payments.
In January, BMO put the project into receivership. Court documents reveal the property’s seven creditors, including lenders based in China, are at odds over how to move forward. The city’s assessed value on the property is just $98-million.
Court filings show while some lenders may take a bath, BMO’s $82.2-million loan is likely to be paid in full. The bank’s claim ranks ahead of other creditors. It has the court’s blessing to start a sales process in late February and accept offers in April. Last year, a rival Vancouver real estate company, Chard Development Ltd., bid $93-million for the property, which the former owners turned down.
If the receiver – Deloitte – can sell the Vancouver property and BMO’s loan is repaid, the impact on the bank’s problem loan portfolio is significant. In the most recent quarter, BMO set aside a total of $446-million for credit losses.
If all the banks match BMO’s experience in downtown Vancouver, and come through this real estate cycle with relatively modest loan losses, it would come as a pleasant surprise to investors and regulators.
Last October, federal regulators at the Office of the Superintendent of Financial Institutions updated their risk outlook for the banks and flagged mounting problems in commercial real estate as a major concern. Those well-founded fears weighed heavy on the share prices of all Canada’s banks.
Since last fall, sentiment around loan losses has improved, and the banks’ stock prices have jumped. After a RBC Capital Markets investor conference in January that saw all the bank chief executives make presentations, analyst Darko Mihelic said in a report that “the banks expect provisions for credit losses (PCLs) to continue to normalize, but not revert to peak levels seen in previous recessionary environments.”
He added: “While commercial real estate losses and potential concerns about mortgage renewal shock still persist, investor concern regarding PCLs is not as high as is typical, likely reflecting a consensus call for a ‘soft landing.’”
Working out bad loans can mean a brawl between borrower and bank. It’s a contentious, time-consuming process. Expertise in restructuring loans – a skill set that was seldom required over the past decade, when rates were low – is now essential at every bank and corporate law firm. Lenders have to be willing to occasionally seize the keys of properties they never wanted to own.
There’s a wonderful chapter in Tom Wolfe’s novel, A Man In Full, detailing a hard-nosed banker’s boardroom showdown with a debt-heavy Atlanta developer. The session leaves the borrower soaked in sweat after making numerous concessions and giving up most of his fortune.
Similar scenes are now playing out in Vancouver boardrooms, and with developers across the country. And the banks are winning these battles.
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
