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“Life would be infinitely happier if we were born at 80 and gradually move toward 18.” -Mark Twain
THIS WEEK IN FACTS BY EMAIL: China Real Estate markets wobbly – will they keep buying Vancouver? Large Chinese Buyers buy another resort. Microsoft downtown – what does it mean? Depreciation report impact?
Will be up May 10, 2014 after 10 AM. Overseas buyers impact in our markets. Okanagan perking up? (Lost your password? Call Lubna at 604-683-1111) Best time
to call the hotline? After 5 PM or on the weekend.
TIP OF THE WEEK:
Don’t buy Timeshare, Quarter-share or Hotel type real estate units … Ever!
- China Buyers Snap Up Another Resort
- Microsoft Will Wake Up Vancouver Condo Market
- Hotels Revenues Looking Sweeter
- Depreciation Reports: Less Than 20% Have Signed On
- Warehouse Space Being Priced Near Condos
- Chilliwack Seeing Stronger Home Sales
- 5 Reasons Why A Bank May Refuse To Finance Your Flip
- Talk, Talk, Talk
- Plot Of The Week
I N T E R N A T I O N A L: Chinese Real Estate Market Wobbly?
A lot of press this week on the Chinese real estate market. All sorts of predictions, JREI also believes that it is important to stay on
top of China’s economic news for reasons of our commodities, our Canadian dollar (will go down if they buy fewer commodities, etc.).
However we are looking at it strictly from the point of view of will a Chinese real estate market collapse stop Chinese investment coming to Vancouver?
Clearly, as in many countries real estate is one of the most important sectors in the Chinese economy. (Real estate construction accounted for about 16% of
Chinese GDP last year. This level approaches the levels in Ireland and Spain before their housing bubbles imploded.) There are also confusing reports of
Shanghai and Beijing prices rising and yet overall values declining. Probably similar to Canada: Real estate prices are still growing in
large cities, but have started to decline in third and fourth tier cities.
The fear of course – like the one expressed by our Finance minister last year – is the very large debt that overhangs the real estate market. Plus the
impact on local governments: Land sales and property-related taxes provide 38% of total government revenue. Any reversal in house prices, sharp losses
would likely follow. And not only local banks and local governments, foreign investors are also directly exposed through Chinese developer bonds ($48 billion US dollar bonds and $6 billion in renminbi denominated debt.)
Ok, so what impact would that have on Chinese overseas investment, particularly Vancouver?
There are two schools of thought:
1. Lose money at home, pull back overseas investments. (Like US investors leaving Whistler when their markets collapsed at home.)
2. Big money is aware of this and that is why money is surging out of China in the hundreds of millions now … and a lot of it coming here.
While the long term impact remains unclear (Canada’s housing market was forecast by a hundred pundits to collapse for the last 5 years), we think money in
2015 will continue to come into Canada and not just condos either. And it will continue to distort the market in big cities and have little or no impact in
the smaller ones, other than larger projects, see next story.
C A N A D A: China Buyers Snap Up Another Resort
The 217-room Lake Okanagan Resort near Kelowna is the latest purchase of B.C. resort real estate by Chinese investors. It was sold by Jones Lang Lasalle but we don’t know the price yet. The property includes a 158-slip marina and the only licensed beach on Lake Okanagan,
a nine-hole golf course and 15 acres of development lands. Mark Lester of JLL confirmed the buyer is an investment group from China.
Lester was flying to China this week to meet with other potential investors.
“This is a resort in the Interior that five years ago we would not have imagined would have been part of the investment profile of mainland Chinese,”
Lester said. “It’s a tourism investment club that wants to be able to have a destination to bring people.” The deal is only the latest in a string
of recreational or hotel purchases by China investors. As we reported here earlier, since January, investors from China have bought:
the Sechelt Golf and Country Club; a marina and resort at Garden Bay on the Sunshine Coast; a 46-acre island off the coast of Pender Harbour; and even
the Gibsons movie theatre.
Last year, China’s Suzhou Youth Travel Services Co. Ltd. through its subsidiary, SSS Manhao International Tourism Group has received
approval for a 240-room hotel in downtown Nanaimo tagged at $50 million that would be integrated with Suzhou’s tour offerings. The past year also saw the
purchase of the Harrison Hot Springs Resort near Chilliwack and the Brentwood Bay Resort and Spa near Victoria, all by
investors backed by mainland Chinese cash.
Major Point: Apparently, Chinese investors are preparing the ground for the expected inflow of tens of thousands – Suzhuo expects 70,000 visitors at his Nanaimo hotel
in the first year – of Chinese tourists into B.C. over the next few years.
Microsoft Will Wake Up Vancouver Condo Market
If the thought crossed your mind that the downtown Vancouver condo market would slow down or that prices will fall, think again. The news that ultra-giant Microsoft is opening a 143,000 sq. centre right in the heart of the city pretty well kills that idea. The new game centre
will dominate Cadillac Fairview’s Pacific Centre, which was once the old Eaton’s/Sears building (which we always thought was ugly).
Microsoft’s new four-level of offices will be staffed with 400 smart, highly-paid and urban-savvy technos. And, with Microsoft in town, look for other big tech players to jostle for space in the city.
As well, underneath the Microsoft space will be a 290,000-square-foot Nordstrom as the luxury U.S. retailer joins a parade
of high-end retailers coming into downtown Vancouver. Take a walk down Alberni Street to see the transformation that is already taking place. The Trump Tower, with is $1,500-per-square-foot condos and the new Gillespie tower at the south end of Granville Street,
designed by a rock star European architect, are further evidence that Vancouver’s high-priced real estate market is heading in only one direction:
Hotels Revenues Looking Sweeter
For the first time in six years, Vancouver hotel revenues are perking up but the real strength is being seen in Calgary where occupancy levels are close to 75% despite record levels of new hotel construction.
In downtown Vancouver only two hotels are underway – the 187-room Trump International and the 75-room Crystal Blue –
which will keep demand strong despite a slower economy than in Calgary. High land costs in Vancouver are expected to keep new construction in check,
according to HVS International, for at least the next year.
Last year, hotel occupancy levels in downtown hotels reached 71% and are expected to reach 72% this year and 74% in 2015:
this is a big turnaround from the last five years, when levels of 55% were not uncommon. Even better, REVPAR (revenue per available room)
are flirting with record levels.
Last year, the average in downtown Vancouver was $118 per night; this year it is $162 with a similar level expected in 2015, due to higher cruise passenger
traffic and a better year for conventions. The average room rate in downtown Vancouver is now $173 per night, the highest level since 2011.
If Vancouver is heating up, Calgary is on fire. With $18 billion in overall commercial construction underway in the city, the increase in
the hotel room supply will shatter all previous records by next year, when 1,327 new hotel rooms open. To put this in perspective, Calgary’s hotel
inventory will increase 3.3% this year and a further 10% next year. The occupancy level is at 73% and will slip to 70% in 2015 due to rush of new rooms.
Calgary – where the average hotel room rate is $167 – will see REVPAR increased from $118 in 2013 to $122 this year and leveling at $121 in 2015 as all the
new hotel rooms open. Notes HVS analyst Monique Russell,
“The fact that Calgary can absorb such a huge influx of rooms and [still] maintain a healthy occupancy rate of 70% is testament to the strength of this
Major Point: Hotels are a handy harbinger for an economy. As reflected in the hotel stats, B.C.’s GDP growth is projected at 2.1% this year and 2.8% in 2015. Alberta
by comparison will see 3.7% GDP this year and 3.5% in 2015.
Depreciation Reports: Less Than 20% Have Signed On
As of December 13, 2013, British Columbia’s approximately 30,000 strata corporations were supposed to have contacted qualified providers for acquiring
depreciation reports as mandated by the Strata Property Act, Regulations and Amendments requirement, or voted by 75% to exempt themselves.
But according to one of the largest appraisers in BC, which has one of the biggest depreciation report divisions, less than 20% of stratas
have signed on.
“Anecdotal evidence is 50% did nothing, by way of not voting, 15%-20% ordered the report and the balance voted to exempt themselves,”
said Jeremy Bramwell, president of Bramwell & Associates Realty Advisors Inc.
There are some valid reasons to defer the depreciation report.
- Bare-land strata corporations have no real need to get a depreciation report as there is no common property. However, this is a small portion
of the stratas in British Columbia.
- Another reason is that the Strata Corporation is new, with a warrantee in place. The legislation states the Strata Corporation does not have to
vote until the second Annual General Meeting.
- The final reason is that the Strata Corporation is terminating. No reason to get a report if the Strata is winding down or at the end of its
physical and economic life. Again, this is small amount of stratas.
But Strata corporations that have even a little common property in the form of shared streets and underground services should have a depreciation report.
The main reasons are below:
- Purchasers are looking for them to get an understanding of their long-term obligations.
- Lenders are looking at them to understand their risk, as well as the risk to the borrower.
- Insurers are looking at them to understand their risk.
- Recent changes in the Strata Property Act mean
Strata Councils can get work done using the funds for work indicated in a depreciation report from the contingency reserve fund (CRF) with a simple
majority as opposed to 75% if there is no depreciation report
. This is a significant change to make it easier to manage a property once a proper planning tool is completed.
- Owners are looking at the reports to save and get ready for special assessments. You cannot save for something you do not know is coming. It is also
easier to raise contributions to a CRF over sudden special levies.
There are strong economic arguments to getting a Depreciation Report.
- Purchasers are going to properties with Depreciation Reports. They are offering less money to those sellers who don’t have reports. As more and more
depreciation reports are provided, this trend will become more prevalent.
- Lenders who do not have depreciation reports will raise the mortgage interest rates to offset the increased risk. Higher mortgage rates will force
down the offer price from the buyer as more money is required to service the loan. Or in older buildings, they may decline the loan.
- Insurers will increase premiums to offset their increased risk.
- Strata Councils will have more management problems as they have to achieve 75% + votes to use money in the CRF, increasing the amount of deferred
maintenance in a project.
- There is increased potential of foreclosures and costly legal action as owners cannot meet Special Levies.
I think it was logical for a lot of strata councils to exempt themselves in the first year. Many councils are not sure what is involved, who to hire
(Engineer firm or Real Estate Institute approved designate) and so on. There may be many reasons to exempt themselves. It is legal, but will become more
economically problematic over time as increasing non-compliance costs increase and buyers become more aware and more and more strata councils can provide a
report – raising questions in buyers mind why a particular one does not have it.
Warehouse Space Being Priced Near Condos
Industrial real estate prices in parts of Metro Vancouver are flirting with levels in the residential condominium market, with some industrial space
selling for $500 per square foot.
In a report released in May, DTZ Vancouver Real Estate Ltd. notes that the average price for a strata industrial property averaged $300
per square foot in Vancouver, Burnaby and North Vancouver during the first quarter of this year. Strata industrial is sold rather than leased.
“We have seen [industrial] sales at $500 per square foot,”
said DTZ director of research James Fraser, but he noted that this often reflects the land value. The average price for a resale low-rise
condominium in Metro Vancouver is $414 per square foot, according to market research firm Strategics.
And, while the strata industrial buyers were traditionally owner-occupiers, more investors are now turning from the residential sector to industrial, lured
by potentially better returns.
The capitalization rate on industrial strata is around 4.5% while the returns on residential rentals is 3.5%, if you are lucky.
DTZ research shows that industrial strata prices have increased by nearly 33% since the first quarter of 2013. This compares with Metro Vancouver
residential condo prices, which have risen just 2.5% in the same period.
Some industrial investors are targeting Vancouver’s Main-Cambie area, because a recent zoning change from the City of Vancouver now allows a higher office component in what had been industrial space. In the first quarter of this year, $24 million
worth of industrial property sold in that area compared to $15.2 million in the fourth quarter of 2013.
The current industrial vacancy rate across Vancouver, Burnaby and North Vancouver is 2.8% according to DTZ research, up from 2.6% in the fourth quarter of
last year. There is little new industrial construction planned, Fraser said. As a result, DTZ is forecasting continuing low vacancy rates and higher prices
for industrial strata space this year.
JREI has recommend for 15 years to buy “the space that you have your business in”. Whether that would be an industrial warehouse (with an office component
– we said) or commercial strata spaces. The value increases in the buildings, have often exceeded the profits made in the businesses that they housed.
Chilliwack Seeing Stronger Home Sales
The normally sleepy homes sales in Chilliwack woke up last month, with 240 homes selling, including 131 detached houses, up by about 50
units from April 2013. Price appears to be a big lure. In Metro Vancouver, the benchmark detached house price is now around $960,000 and it is $566,000 in
the Fraser Valley.
But in Chilliwack, the highest number of detached houses sold (31) were in the $300,000 – $349,999 range, followed by 29 in the $350,000 – $399,999 range
and 28 in the $400,000 – $499,999 category. There were 10 houses over $500,000 sold last month.
The sales-to-listing ratio is at 15%. At the end of April, there were 1,643 active listings on the Chilliwack and area real estate market, down from 1,727
listings in April 2013.
5 Reasons Why A Bank May Refuse To Finance Your Flip
“Flipping houses can be a very lucrative way to make money in real estate, but many banks are wary of lending to an investor who wants to flip for a
says Kyle Green of Mortgage Alliance (778-373-5441, email@example.com).
There are many reasons your flip may get declined, here are some tips to help avoid these issues:
1. You told the bank you are flipping the house. Don’t ever tell the bank you intend to flip the property. Their concern is that they will make hardly money off of you (in
fact, on a short term flip they are likely to lose money putting it all together for you), and that you may be doing extensive renovations to the property.
If you rip the house down to the studs and then run out of money, you are putting the banks’ security as risk. As most flips involve small or large scale
renovations, this is common and is considered risky for the bank.
2. The condition of the home is poor.
Lenders don’t like lending on properties in poor shape, as they typically are more difficult to resell. Although for a real estate investor a “fixer upper”
or “needs TLC” type of property screams “I am going to make you money”, this type of property only appeals to those who are willing to put the work into
the property. The average homeowner is usually looking for something they can move right into, and that means it could affect resale value if the property
is in rough shape at the time it is foreclosed on.
3. The remaining economic life of the property is low. The maximum amortization is always the remaining economic life minus 5 years. So to get a 30 year amortization, a 35 year economic life is required. So a
house that is primed to be bulldozed and rebuilt, it can be difficult to get an appraiser to say it will still be there in 35 years. Remember this is the
economic life, not how long it could stay there assuming it was kept in good condition. If it is surrounded by redevelopment, it is likely it will be
4. You have a history of flipping. This ties into #1, but if it is evident that you have bought and sold many properties recently (particularly with the bank you are applying with) they
may suspect you are planning on flipping this home as well.
5. You need rental income to qualify. Many banks now will only use rental income if there is a lease in place prior to completion of the purchase. It may be difficult or downright impossible
to get a tenant in place for a property in poor condition. This problem gets worse if you plan on renovating the property as the tenant probably won’t want
to live there while extensive renos are being down, and also know that they will only be living there for a short period of time.
Major Point: Good advice Kyle. So, if you are looking to finance a flip, it is important that you talk to a good broker ahead of time to discuss the deal and ensure
you will be able to finance the purchase.
Talk, Talk, Talk
speaks THIS SUNDAY at the Taiwan Young Professional Entrepreneur Association of BC.
Residential & Commercial Real Estate Success, Secrets & Tips.
—Why real estate will always be your best investment
—3 ways to buy an apartment building with no money down (sample buildings)
—5 tips to structure an innovative deal
Many other speakers and topics
6111 River Road, Richmond, British Columbia, Richmond Oval, Room 1055
1:30 to 4:00 PM
Look it up here:
PLOT OF THE WEEK:
Nanaimo, newer single family home with a 2 bedroom suite plus 3 beds upstairs. It cash flows, it needs no work. Price: $339,900.
There is no charge and absolutely no
warranties given either. You have to check it up yourself.
To subscribe to Jurock’s Facts by Fax ($177 p.a.) call 1-800-691-1183 or 604-683-1111 or fax 604-683-1707.
While the above information is compiled from sources believed to be reliable, its accuracy cannot be guaranteed
Any type of investing carries inherent risks; as such, JREI cannot assume responsibility for any subscriber’s actions.