One of Canada’s largest owners of apartment buildings and multifamily properties is struggling to turn around two funds that bet on U.S. rental housing, with higher rates and an oversupply of new units eating into profits.
Starlight Investments, run by Canadian real estate magnate Daniel Drimmer, launched two funds that invested in U.S. rental properties during the COVID-19 pandemic with hopesthat rising rents and low interest rates would keep sending property values soaring.
By November, 2022, however, the two publicly traded funds, known as the Starlight U.S. Residential Fund and the Starlight U.S. Multi-Family (No. 2) Core Plus Fund, faced some significant headwinds, and both halted their distributions because higher interest rates had sent their mortgage costs soaring.
The pain has only worsened since, and this week both funds reported negative funds from operations in 2023, which is a measure of profit for real estate investment funds. Not only have elevated interest rates continued to weigh on profits, because the funds’ mortgage costs have jumped, but there is now also a growing supply of multifamily properties in the markets in which the funds have invested, including cities such as Phoenix, Orlando and Austin, Texas.
Because interest rates have soared, last year the U.S. Residential Fund’s weighted average interest borrowing cost climbed to 5.78 per cent, up from 1.97 per cent in 2021. At the same time, the completion of new rental properties has hurt rental prices, and the fund’s average monthly rent fell 0.4 per cent last year.
“The primary markets in which the fund operates in have seen an elevated level of new supply delivered during 2023 which contributed to the deceleration in rent growth in the primary markets during late 2023,” Starlight told investors when reporting earnings.
Starlight also explained its U.S. funds are particularly vulnerable to higher interest rates because the fund largely relied on variable rate debt.
Starlight owns roughly $25-billion worth of properties across Canada and the U.S., and its two publicly traded funds that focus on U.S. rental properties have $1.1-billion in assets under management. Both U.S. funds were set up to buy American properties that could benefit from rental rate increases as tenants turn over, and they were designed to be short-term investment vehicles that bought properties and then sold them after three years.
Because the market dynamics have changed so quickly, both funds’ unit prices have plummeted since going public in 2021 and are now down nearly 70 per cent.
Their struggles mirror those of Starlight’s third publicly traded investment fund, True North Commercial REIT, whose units are down nearly 80 per cent since February, 2020. True North largely owns Class B office towers across Canada and last November the REIT halted its monthly distribution, just like the two U.S. funds.
Starlight’s short-term strategy has worked before, and its U.S. Multi-Family (No. 1) Core Plus Fund sold its portfolio in September, 2021, and investors earned a roughly 28-per-cent return in less than two years. However, Starlight was eventually caught off guard by the magnitude of interest-rate hikes.
“The size and pace of interest rate increases has been unprecedented and has resulted in interest rates that are significantly higher than projected at the time the fund financed its properties,” Starlight told investors when it first halted distributions on its two existing U.S. funds.
Starlight isn’t the only Canadian real estate manager to struggle with U.S. rental housing. Dream Residential REIT went public in May, 2022, hoping to capitalize on rising rents, but its units have also fallen, down 50 per cent.
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.
