The portfolios, which comprise 675 apartments located within the City of Toronto, range from a 187-apartment high-rise to an 18-apartment block.
The sale closed on Aug. 7, but none of the firms involved publicly announced the transaction.
Starlight purchased four of the properties for about $113 million, while Timbercreek bought the other three for about $80 million, according to data supplied to RENX by Altus Group. They are (listed from smallest to largest):
* 5 Glenavon Rd., Old Toronto: 18 units, $3,385,000 ($188,056 per unit);
* 10 Wilmington Ave., North York: 39 units, $10,078,329 ($258,419 per unit);
* 1050 Castlefield Ave., York: 64 units, $17,861,000 (279.087 per unit);
* 8 Milepost Place, East York: 76 units, $21,204,000 ($279,000 per unit);
* 2570 Kingston Rd., Scarborough: 117 units, $32,511,670 ($277,878 per unit);
* 740, 746 Midland Ave., Scarborough: 174 units, $49,146,000 ($282,448 per unit);
* and 2050 Keele St., North York: 187 units, $59,564,000 ($318,524 per unit).
Signet Group is a Toronto-based property owner and manager, with interests in both multiresidential and commercial properties (spanning the retail, office and industrial sectors).
“Value-add” purchase for Starlight, Timbercreek
Although he was not able to speak about the buyers or sellers due to confidentiality restrictions, Colliers International senior sales representative Dayma Itamuloana said the portfolio comprises buildings constructed mainly in the 1960s and 1970s.
As such, they fall into the “value-add” types of properties which have been most coveted by purchasers during the COVID-19 pandemic.
“A number of them would have some decent cap-ex put into them, including new boilers,” Itamuloana said.
“But, certainly (there is) room for capital improvements when it comes to potentially modifications to the parking garage, new roofs, balconies, that kind of thing.
“These would be properties that would likely be part of a value-add kind of operation for the buyer.”
The team of Itamuloana, Good Cook, John Powell and Thomas Cattana at the Colliers Toronto office brokered the transaction.
It’s the latest deal to be unveiled during a busy couple of weeks for apartment sales.
Among the other transactions, both CAPREIT and InterRent purchased Southwestern Ontario portfolios from Homestead Land Holdings. CAPREIT also purchased a new 88-unit building in Halifax.
Multiresidential investment continues
That doesn’t surprise Altus Group vice-president of data operations and data solutions Ray Wong, who said while most commercial real estate sectors are seeing much-reduced investment activity, the multiresidential sector has barely skipped a beat.
Despite an almost complete shutdown on transactions for about a month when the pandemic hit in March, multiresidential transactions in Toronto were only off by 15 per cent year-over-year in Q2 2020, said Wong. That gap could quickly close during the coming months.
“It’s mainly in the older stock that is moving,” Wong acknowledged, “and that is the challenge in the market right now, that it’s getting tougher and tougher to find those types of assets.
“We definitely see from an investor demand perspective that they are focusing on their goals and strategic directions again after a three-month pause and reflection. We know everyone is looking for assets, especially with the apartment players.
“It will be interesting to see the second half of the year.”
Wong said one factor which could slow deals is discrepancies in pricing expectations.
Vendors aren’t looking to discount their properties, but Wong said buyers might be expecting cap rates to move up to 20 basis points due to the possibility of rent deferrals, abatements or bad debt as a result of the pandemic.
“That is going to be interesting moving forward, whether or not some of the funds and some of the investors are looking for opportunities, whether or not they are looking for more of a discount than vendors are willing to pay.”
About Starlight, Timbercreek
Starlight is a privately held real estate investment and asset management company which by the end of 2020 expects to be Canada’s largest landlord with nearly 60,000 apartment units.
Starlight and its entities currently own 30,000 suites and have recently acquired, with partner KingSett Capital, the 26,723-suite portfolio of Northview REIT. Starlight also has 10,000 suites in the U.S. and seven million square feet of commercial property.
It manages a total of $14 billion in housing and commercial assets.
Timbercreek in a Toronto-based real estate investor, developer and manager with more than $10 billion in assets under management in North America, Europe and Asia. It has 19 global offices.
Moody’s Doubles Down On Forecast of Canadian Real Estate Prices Falling Soon – Better Dwelling
One of the world’s largest credit rating agencies doubled down on its Canadian home price forecast. Moody’s Analytics sent clients its September update on Canadian real estate prices. The forecast reiterates they expect price declines to begin towards the end of this year. The report also names impacted cities this time, with Toronto expected to be a leader lower.
A quick note on reading Moody’s charts, which includes “forecast vintages.” If you’ve only looked at consumer forecasts, these might be new. They’re scenarios that vary depending on the forecasting model’s inputs. Instead of giving a forecast like, “prices will drop x%,” they give a range based on factors. These factors are fundamentals that have typically supported prices.
The Moody’s forecast shows vintages as baseline, S1, S3, and S4. The September baseline is the scenario they believe has the highest probability. The S1 is what happens if indicators are better than expected. This would mean unemployment drops fast, and disposable income doesn’t fall much. The S3 is what happens if fundamentals are worse than expected. S4 is the worst scenario that can unfold in a reasonable amount of time. Abrupt scenarios and black swans can still be worse. It’s just those are outside of the range of reasonable expectations.
Canadian Real Estate Markets To Start Showing Weaknesses Soon
Moody’s previous forecast didn’t expect the market to show signs of weakness until Q3, and they’re doubling down. The report’s economist expects stimulus, mortgage deferrals, and interest rates to contain damage until Q3. They expect by Q3, the optimism of those programs will begin to wear thin. The reality of how meaningful the improvements are, should be apparent by then. The optimism should then fade. It’s at this point they believe prices can no longer defy employment, vacancy, and delinquency rates.
Canadian Real Estate Prices To Drop Around 7%
The firm expects all scenarios to show a drop in the near future, but how much depends on fundamentals. In the September baseline, the firm’s economist is forecasting a ~7% decline at the national level. This scenario expects unemployment at 8.56%, and a 2% drop of disposable income next year. Since the rise in disposable income was due to temporary supports, the fall is expected.
In the other scenarios, things vary from a brief drop to a very deep, multi-year decline. In the S1 scenario, there’s only a brief dip in Q1, before prices rocket even faster and higher. In S3, a slightly worse than base case, prices fall about 15%, taking them back to 2016 levels. In S4, if disposable income, GDP, and/or unemployment worsen, prices drop about 22%, back to 2015 levels. Of course, this trend isn’t evenly distributed across Canada. However, it’s also not distributed how most might expect.
Prairie Cities and Toronto Real Estate To Lead The Declines
The base case sees Prairie cities and Toronto real estate leading price declines. Calgary, Edmonton, and Regina lead the drop, with a peak-to-trough decline between 9 to 10%. This is a trend already apparent in the regions’ condo markets. Toronto, a little more unexpected, is forecasted to see a 9% price drop, from peak to trough. Vancouver’s drop is forecasted below the national average, with an average decline of almost 7%. The last market is interesting, since other organizations gave Vancouver much worse forecasts.
Toronto Real Estate To Experience Uneven Declines Across Regions
The base case for Toronto expects an uneven decline, with some regions harder hit. The drop across Toronto CMA is expected to be about 9%, from peak to trough. Pickering should see smaller declines, but experience minimal growth through 2025. Markham is the most surprising though, not expected to hit 2017 highs by 2025. The trend here appears to be regions short on space will recover the fastest. Although that is likely to depend on the type of housing as well.
The forecast notes pandemic uncertainty, and its potential to bring greater downside. As it gets colder, the potential of more indoor activity may lead to a second wave. The report’s economist believes this can bring even larger declines to prices. Shifting consumer behavior is also a wild card that can also push prices lower, as are any vaccine delays.
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Will development remain key growth strategy for REITs? | RENX – Real Estate News EXchange
Development has been a key growth strategy for many real estate investment trusts over the past decade, but will that continue during the next 10 years?
“There has been some dislocation in the short-term operating metrics,” CIBC World Markets REIT analyst Dean Wilkinson said. “I think the question we’re all struggling with is: Is this a permanent structural shift in a downward direction with the underlying fundamentals of the real estate, or have we overshot?“
“Projects are getting bigger and more complex, and we’re seeing a lot of mixed-use,” said Altus Group cost and project management senior director Marlon Bray, who noted he’s being inundated with proposals. “I’ve got people sending me six, eight, 10 projects to look at in the space of two or three weeks.
“They’re looking long-term at pipelines and thinking of the future and not just what’s going to happen tomorrow.”
Transit-oriented and mixed-use development
Immigration has slowed considerably during the pandemic, but it’s starting to rise again and those people will need places to live and work.
While public transit ridership has decreased during the COVID-19 pandemic, SmartCentres REIT (SRU-UN-T) development VP Christine Côté said transit-oriented development is still desirable and should remain a focus for REITs and all levels of government.
Dream Unlimited (DRM-T) chief development officer Daniel Marinovic said a lot of critical transit infrastructure work began in the Greater Toronto Area in 2008 and, while it will be ongoing for years to come, he believes it’s a “phenomenal” long-term investment.
“I’ll continue to be a big believer in density,” said Marinovic.
Allied Properties REIT (AP-UN-T) executive VP of development Hugh Clark remains a strong advocate of the “live, work and play” concept and believes it will continue to prosper. He said mixed-use projects need amenities to help people socialize.
Grocery stores, restaurants and services and amenities catering to the daily needs of the local community will become more important additions within residential buildings, according to Côté.
“We feel strongly that value-oriented retail will continue to be strong,” she said.
Construction costs levelled off from April through June, but have ramped back up due to supply and demand factors.
Bray attributes some of the increase to the 7,000 condominium units and 10,000 rental units under construction in the Greater Toronto Area, more than double the numbers from 10 years ago.
Bray pointed out construction costs comprise less than 50 per cent of residential development expenses.
Land can account for as much as 30 per cent, while development charges and taxes are also major costs. Development charges have increased by multiples and are always changing and hard to predict, said Bray.
Wilkinson said the saving grace over the last several years is that rent increases have “probably gone at, or at a level higher than, the inflation surrounding those construction costs. But if the script gets flipped and it goes the other way, what could happen?”
Specific issues for REITs
No more than 15 per cent of a Canadian REIT’s funds are generally allowed to be spent on development, which Wilkinson said is lower than in other countries.
The potential build-out for some Canadian REITs, particularly those with retail sites with inherent density, is larger than their current gross leasable area.
Wilkinson added that development activity isn’t included in the underlying value of a company until a building is finished. Thus, a short-term construction expenditure is a diluted effort because capital is put into something that’s not creating immediate cash flow.
There’s an increase in NAV after the completion of projects, but the public market is still focused on quarterly results instead of longer-term cycles, according to Wilkinson.
As a result, Allied is taking a prudent, market-driven approach to development and isn’t looking to expand just because it can.
Clark said the REIT may slow the launch of new projects and ensure it hits certain pre-leasing requirements before starting construction so it doesn’t put itself in a “position of strain.”
Returns for REITs are getting smaller
Clark said it’s “getting harder and harder to make some big gains, with eight or nine or 10 per cent returns on investment.” While it’s possible with some high-priced condos, those are few and far between.
Clark thinks REITs will be lucky to keep a 100- to 150-basis point spread going forward. A development yield of 150 basis points over the acquisition cap rate is much lower than the 400- or 500-point spreads of the past, Wilkinson added.
The convergence between the two figures could mean the elimination of compensation for development risk, so developers may have to start looking more closely at portfolio quality versus straight economic accretion.
“There’s value to that, but it remains to be seen how the market wants to treat that,” said Wilkinson.
Apartment rents have sagged recently due to the COVID-19 pandemic, and Wilkinson said there are concerns market rents may be just 10 per cent higher than in-place rents when apartments being built now are completed.
“The premium that was afforded to a lot of the apartment REITs was really based upon the fact that their in-place rents were 20 to 25 per cent below what was deemed to be market rent. So, they were trading at 20 to 25 per cent premiums to NAV.”
Côté has been with SmartCentres for 17 years, and her focus in that time has changed from building Walmarts and shopping centres to intensifying existing properties across Ontario.
“We’ve got countless master plans that are in place now and we are preparing, submitting and processing development applications for those initial phases of redevelopment across the portfolio,” she said.
SmartCentres has made applications for more than 20 development projects since the onset of COVID-19 and will submit another 20 over the next six months, according to Côté.
The REIT has more than 40 million square feet of density planned, mainly on sites it already owns, and has a long-term plan for much more than that.
Côté said SmartCentres is taking more time with new building design to increase efficiencies and make them more economical.
Despite the recent softness in rents, Côté doesn’t think the REIT’s planned purpose-built rental apartments will be switched to condos.
She believes the market will be past its short-term challenges by the time those buildings are ready for occupancy.
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