Queen Street West in Toronto, March 26, 2022. Willow charged $36.06 to buy one unit of a retail and residential property in a popular shopping area on Queen Street West in Toronto in 2022.IAN WILLMS/The New York Times News Service
A commercial property-sharing startup aimed at retail investorsis the latest real estate venture to face trouble amid higher borrowing costs.
Willow LP, which was acquired by an online rental-services company in late 2023, was part of a new wave of property investing called “fractional investing or prop sharing” that became popular when the pandemic’s spike in property prices enticed more Canadians to invest in real estate.
Unlike real estate investment trusts, in which investors purchase units in an entity that owns a large portfolio of properties, fractional-investing companies give individual investors a chance to own a piece of a commercial property, such as a retail building or office tower. Fractional investing became especially attractive for younger investors.
Willow charged $36.06 to buy one unit of a retail and residential property in a popular shopping area on Queen St. West in Toronto in 2022, according to legal documents it provided to investors.
But now with higher interest rates, hundreds of small investors have seen the value of their investment decline between 50 and 60 per cent, according to a December e-mail sent to Willow investors from the company’s new owner, Montreal-based Solutions Guiker Inc.
When Canada’s central bank raised interest rates by 4.75 percentage points from March, 2022, through July, 2023, the real estate industry was sideswiped by soaringdebt payments, a slowdown in property sales and waning investor demand.
Willow’s model of fractional investing was particularly susceptible to higher mortgage costs, as the risk was not spread out across a large number of properties.
“You’re investing in one building, purchased at a particular point in time,” said Doug Sarro, a securities law professor at University of Ottawa. “What if the management firm bought at the top of the market, or couldn’t get a mortgage on favourable terms? What if the building ends up needing major repairs, or key tenants leave? Investors will feel the full force of these risks,” he said.
That appears to be what happened to Willow’s investors.
Willow launched in early 2022 and bought two commercial properties just before the Bank of Canada embarked on its aggressive plan to slow inflation with interest rate increases. The company got a variable-rate mortgage from subprime lender Timbercreek Capital because it did not raise enough equity to qualify for a conventional loan, according to a presentation that Solutions Guiker made to Willow investors last year.
The mortgage on Willow’s two properties amounts to $8.325-million, with an annual interest cost of $853,312, according to the presentation. That interest cost is up nearly 80 per cent from $478,688 in early 2022.
The loans Willow secured from Timbercreek Capital TF-T have an interest rate of 3.05 percentage points above the prime lending rate, according to the presentation. Today, the prime rate is 7.2 per cent, making the interest rate on the loan 10.25 per cent. When Willow took out the loans in April, 2022, the prime rate was 2.7 per cent and Willow was paying 5.75 per cent interest on its mortgage.
“We can no longer sit on these two properties while it’s losing money without [making] any decision,” Solutions Guiker chief executive Nan Hao said in the presentation.
The net asset value or shareholders’ equity value of the Toronto property is down 52 per cent to $1,153,850, according to an e-mail Solutions Guiker sent to Willow investors. The equity value of the second property – a retail building in Ottawa – is down 62 per cent to $331,084.
The near doubling of borrowing costs is consuming an increasing amount of the properties’ rental revenue. As well, the value of the real estate dropped significantly as rates rose, according to valuations by commercial real estate firms.
In an interview with The Globe, Mr. Hao said he plans to sell the Ottawa property, which Mr. Hao said that was part of the plan to minimize Willow investor losses.
As for the Queen Street property, Mr. Hao said he is trying to raise enough equity so that he can get a conventional mortgage with an interest rate below 6 per cent.
He said the properties have good tenants but that Guiker can’t keep the properties without a cheaper mortgage.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
