Transit City Condos, being developed by a JV led by SmartCentres REIT, at the Vaughan Metropolitan Centre just outside Toronto. Development and intensification have been key growth strategies during the past decade for Canadian REITs. (Rendering courtesy SmartCentres)
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?
That was the theme of a five-person panel moderated by Lincluden Investment Management real estate equities vice-president and portfolio manager Derek Warren on Sept. 23, as part of RealREIT.
“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.
Development costs
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.”
SmartCentres REIT
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.
TORONTO – The Toronto Regional Real Estate Board says home sales in October surged as buyers continued moving off the sidelines amid lower interest rates.
The board said 6,658 homes changed hands last month in the Greater Toronto Area, up 44.4 per cent compared with 4,611 in the same month last year. Sales were up 14 per cent from September on a seasonally adjusted basis.
The average selling price was up 1.1 per cent compared with a year earlier at $1,135,215. The composite benchmark price, meant to represent the typical home, was down 3.3 per cent year-over-year.
“While we are still early in the Bank of Canada’s rate cutting cycle, it definitely does appear that an increasing number of buyers moved off the sidelines and back into the marketplace in October,” said TRREB president Jennifer Pearce in a news release.
“The positive affordability picture brought about by lower borrowing costs and relatively flat home prices prompted this improvement in market activity.”
The Bank of Canada has slashed its key interest rate four times since June, including a half-percentage point cut on Oct. 23. The rate now stands at 3.75 per cent, down from the high of five per cent that deterred many would-be buyers from the housing market.
New listings last month totalled 15,328, up 4.3 per cent from a year earlier.
In the City of Toronto, there were 2,509 sales last month, a 37.6 per cent jump from October 2023. Throughout the rest of the GTA, home sales rose 48.9 per cent to 4,149.
The sales uptick is encouraging, said Cameron Forbes, general manager and broker for Re/Max Realtron Realty Inc., who added the figures for October were stronger than he anticipated.
“I thought they’d be up for sure, but not necessarily that much,” said Forbes.
“Obviously, the 50 basis points was certainly a great move in the right direction. I just thought it would take more to get things going.”
He said it shows confidence in the market is returning faster than expected, especially among existing homeowners looking for a new property.
“The average consumer who’s employed and may have been able to get some increases in their wages over the last little bit to make up some ground with inflation, I think they’re confident, so they’re looking in the market.
“The conditions are nice because you’ve got a little more time, you’ve got more choice, you’ve got fewer other buyers to compete against.”
All property types saw more sales in October compared with a year ago throughout the GTA.
Townhouses led the surge with 56.8 per cent more sales, followed by detached homes at 46.6 per cent and semi-detached homes at 44 per cent. There were 33.4 per cent more condos that changed hands year-over-year.
“Market conditions did tighten in October, but there is still a lot of inventory and therefore choice for homebuyers,” said TRREB chief market analyst Jason Mercer.
“This choice will keep home price growth moderate over the next few months. However, as inventory is absorbed and home construction continues to lag population growth, selling price growth will accelerate, likely as we move through the spring of 2025.”
This report by The Canadian Press was first published Nov. 6, 2024.
HALIFAX – A village of tiny homes is set to open next month in a Halifax suburb, the latest project by the provincial government to address homelessness.
Located in Lower Sackville, N.S., the tiny home community will house up to 34 people when the first 26 units open Nov. 4.
Another 35 people are scheduled to move in when construction on another 29 units should be complete in December, under a partnership between the province, the Halifax Regional Municipality, United Way Halifax, The Shaw Group and Dexter Construction.
The province invested $9.4 million to build the village and will contribute $935,000 annually for operating costs.
Residents have been chosen from a list of people experiencing homelessness maintained by the Affordable Housing Association of Nova Scotia.
They will pay rent that is tied to their income for a unit that is fully furnished with a private bathroom, shower and a kitchen equipped with a cooktop, small fridge and microwave.
The Atlantic Community Shelters Society will also provide support to residents, ranging from counselling and mental health supports to employment and educational services.
This report by The Canadian Press was first published Oct. 24, 2024.
Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.
Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.
Average residential home price in B.C.: $938,500
Average price in greater Vancouver (2024 year to date): $1,304,438
Average price in greater Victoria (2024 year to date): $979,103
Average price in the Okanagan (2024 year to date): $748,015
Average two-bedroom purpose-built rental in Vancouver: $2,181
Average two-bedroom purpose-built rental in Victoria: $1,839
Average two-bedroom purpose-built rental in Canada: $1,359
Rental vacancy rate in Vancouver: 0.9 per cent
How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent
This report by The Canadian Press was first published Oct. 17, 2024.
