IN THIS WEEK’S FACTS BY EMAIL:
- COMMERCIAL AT $1 BILLION A MONTH – WHERE TO GET IN ON THE ACTION?
- VICTORIA INVESTORS NOTE: A THREAT IN THE BC PRESS RELEASE???
- BC FINANCE MINISTRY WARNED AGAINST IT, BUT FOREIGN BUYERS TAXED ANYWAY
- TREND: MIXED-USE REITS COMMERCIAL / MULTI FAMILY
- 1,800 NEW HOMES FREE OF FOREIGN BUYER TAX
- FARMLAND RESTRICTIONS WILL START AND SPREAD
- WINNIPEG IS STARTING TO LOOK STRANGELY TEMPTING
- FOUR-PLEXES HOLD KEY TO VICTORIA RENTALS
- MORTGAGE RULES: PRIVATE MONEY FILLING THE GAP
- CMHC LATEST VACANCY RATE REPORT
Questions, Questions, Comments
With the month ending on Wednesday is it not likely that we will get at the final numbers till Friday/Saturday. We will update the Hotline Saturday December 3 at 10:30 AM.
Commercial At $1 Billion A Month – And Where To Get In On The Action
As government interference disrupts residential investment in what was Canada’s hottest housing market, Metro Vancouver’s commercial real estate sector is quickly becoming the target of both foreign and domestic investors. (As we predicted in August.)
There was a 94% increase in the total dollar value of Metro Vancouver commercial sales in the first half of 2016 compared with the first half of 2015, to $7.1 billion from $3.7 billion. The number of commercial property sales in the first half of 2016 was 1,464, compared with 1,138 in the same period last year.
Right now, Metro Vancouver’s commercial sector transactions are running at a record-shattering pace of more than $1.1 billion a month: $3.75 billion in the second quarter alone, up 37% from the first three months of this year, per the Altus Group.
We believe this pace has quickened following the 15% tax on foreign home buyers and residential mortgage tightening that came into effect during Q3. The year could end with transactions in the $14 billion range!
The 600 transactions in Q2 – the highest on record for a single quarter – included every type of commercial: office and retail deals doubled from Q1 while residential land and commercial/industrial land sales increased by 36% and 50%.
There have been some eye-popping prices.
- In October, a landed immigrant from China bought an old wood-frame industrial building on a third-of-an-acre on Clark Drive in Vancouver for $13 million, or about $33 million an acre. The nondescript building housed a small upholstery company. “It’s all about future land development,” said the Re/Max Commercial Advantage agent who handled the sale. He believes the foreign-buyer tax on homes is driving offshore buyers into commercial real estate.
- Wall Financial sold the first industrial strata unit at its Strathcona Village mixed-use industrial and housing project on Vancouver’s East Hastings – a first in North America – for $700 per square foot in November. Investors are reportedly lining up for the unique project because lease rates for Metro industrial property have more than doubled in the past year. Colliers said the Strathcona properties could fetch up to $30 per square foot, annually. This compares with a 2015 industrial lease average of around $9 per square foot across Metro Vancouver.
A key factor driving commercial property sales is the low interest rates. “It makes it more affordable to hold land, which is why the sale of developable land represents the biggest chunk of the market,” said Paul Richter, director of commercial property consultants at Altus Group. Empty lots or buildings ripe for multifamily residential are the biggest draw, he said.
NOTE: The foreign buyer tax does not apply to residential land bought for redevelopment, but it does include rental apartment buildings.
Also, as we predicted, there was a rush to list rental apartment buildings after the foreign-buyer tax came in, and price reductions are now being seen for the first time in years. This week, the listing price of an old eight-suiter in East Vancouver was cut by $200,000 to $2.69 million, still the equivalent of $336,000 per suite in a 50-year-old building. We expect to see further price reductions in what has become a vastly overpriced multifamily market.
NOTE: So, what should you buy? Industrial space and retail space, especially in
- Vancouver (East Vancouver/Railtown/Gastown),
- Burnaby (Brentwood, Gilmore and Lougheed areas),
- North Vancouver (Lower Lonsdale and Lynn Valley, especially the Lynn Creek industrial area that is being eyed for up zoning),
- Coquitlam (Austin Avenue and Burquitlam and look at the
- Fraser Mills strata mixed-use development that is coming soon) and Surrey (Central district for retail; Campbell Heights for industrial).
Industrial land is at a premium and lease rates are rising due to fresh demand from the film sector. (We told you to buy movie type properties in January), which grabbed a third of all the industrial space leased this year, and the tech sector.
Retail strip malls are feeding off Metro Vancouver’s nation leading retail spending of $6.3 billion per month and many well-located sites (near transit) are ripe for redevelopment. Retail real estate prices are running at $500 to $700 per square foot in prime areas. Lease rates in Vancouver can be north of $100 per square foot, net annually, but are in the $25 to 40 range in neighbourhing suburbs.
Major Point: Once you achieve annual commercial lease rates above $25 per square foot, you are meeting or beating the typical per square foot income for residential rentals.
Also, you can find commercial capitalization rates in the 4% range in retail and industrial properties, which is higher than in the multifamily sector. In the office sector, buy your business space if possible but don’t expect to get rich fast buying office space and then leasing it out. But you will get rich when you pay it off.
Spotlight: BC Finance Ministry Warned Against It, But Foreign Buyers Taxed Anyway – It Turned Out Even Worse
Last year, when the B.C. government was opposed to a tax on foreign homebuyers, it released a forecast of what would happen if only 3% of foreigners stopped buying. It was a hair-raising outlook but it turned out to be even worse than imagined.
The Finance Ministry report estimated that $1 billion would vanish with a loss of 1.400 home sales in Metro Vancouver; housing starts would fall by 760 units; 3,800 construction jobs would be gone; and $350 billion in GDP would be lost.
Major Point: That gloomy forecast proved optimistic: By October – just two months after the tax came in – Metro Vancouver MLS monthly sales had plunged by 2,200 units, a loss of more than $2 billion. Metro housing starts in October had plunged 50% from a year earlier to 1,013 units with a loss of at least 4,000 jobs. We don’t know what the annual GDP loss will be since the foreign tax came in, but it will likely be also worse than the Finance Ministry forecast.
Trend: Mixed-Use REITs – Commercial / Multi-Family
The first in what we believe will possibly become a trend in the real estate investment trust arena has been seen: a merger of commercial and residential REITs into mixed-property REITs. It makes sense because it reflects the brick-and-mortar reality in big Canadian cities.
This month RioCan REIT announced the creation of a joint venture with Boardwalk REIT to develop a mixed-use, 11-storey residential rental tower on part of the RioCan Brentwood Village Shopping Centre in Calgary.
It won’t be a one-off:
RioCan has 50 other commercial sites it “considers to be strong possible intensification opportunities, all of which are in the six major markets.” RioCan has obtained planning approvals for nine mixed-use projects already with a total of more than 10 million square feet of rental housing and condominiums.
While most are in Greater Toronto, other sites are in Victoria, Calgary and Edmonton.
Major Point: Time to mix up your REIT investments to include commercial REITs mixing in residential? Another REIT on the same track is Allied REIT, which is into three big Toronto joint ventures to mix housing with commercial properties. Still REITs are stock market – you need to study the owners, the management, their track record and precisely what and where the properties are that the REIT owns.
1,800 New Homes Free Of Foreign Buyer Tax
A twist in the Metro Vancouver foreign home buyer tax was the exemption of the Tsawwassen First Nation residential development in South Delta, which the band obtained as part of a land title a decade ago.
The Tsawwassen First Nations plans residential development on 250-acres to build 1,800 homes. Of these, 50 per cent will be detached houses; 35 per cent will be townhomes and 15 per cent will be condominium apartments.
The B.C. property transfer tax and the federal sales tax will apply to the housing sales, but not B.C.’s 15 per cent foreign buyer tax. Residents will pay property and school taxes to the TFN. It is expected, though, that the residential will be on 99-year leases, not freehold titles.
Major Point: Much could be said on this exemption, but for now we’ll leave it alone. NOTE: The foreign buyer tax will apply to housing sales on the 90-acre Jericho lands in Vancouver’s Point Grey, which three First Nations bought this year. This land is not considered First Nation reserve land and is therefore subject to the foreign-buyer tax.
Farmland Restrictions Will Start And Then … Spread
Because, increasingly, government real estate polices in Canada is being dictated by media, we expect B.C. to move soon in restricting farmland purchases by non-residents.
The reason is the recent newspaper headlines about investors buying Richmond and Fraser Valley farmland and then building big houses on it while saving on property taxes by claiming farm income. Once the province starts cracking down on that, it is a short step to restricting province-wide farmland sales.
NOTE: B.C. is the only province in western Canada that allows non-residents to buy as much farmland as they want. Therefore B.C. farmland sells for 10 to 20 times as much as in Alberta, Manitoba or Saskatchewan.
Of course, this has proved a boon to B.C.: one China-based group has bought more than 10,000 acres of farmland near Vanderhoof and is exporting thousands of tonnes of hay annually to Asia to help farmers there battle an historic drought. The higher prices have also allowed existing farmers to leverage financing to help them boost production.
But that will mean nothing if the B.C. government sees a chance to increase voter appeal before the next election, set for May of 2017.
Major Point: If you are holding B.C, farmland right now, consider selling it at what are the highest prices ever seen. NOTE: Once a provincial ban on non-resident buyers comes in, prices will fall.
Winnipeg Is Starting To Look Strangely And Surprisingly Tempting
We have not been a big fan of Winnipeg’s rental housing market in recent years, but Manitoba’s only big city is starting to look more attractive. CMHC pegs the Winnipeg rental vacancy rate at 2.9% and forecasts it holding steady. There is a lack of new rentals in the city but there is a buzz downtown as public and private investments pump into the Exchange District and the Sports Hospitality and Entertainment District, which is anchored by the revamped hockey arena with the Winnipeg Jets NHL franchise. There has also been a big spike in immigration to the city.
“Landlords are able to pass on rent increases. Investors can make money. Rents have been consistently going up in Winnipeg,” said CMHC analyst Lai Sing Louie.
Manitoba has rent controls, but there are generous exemptions for new construction and renovated suites, and owners of old rental buildings can apply for rent control exemptions to cover repair and maintenance costs.
And you don’t have to buy one of the aging apartment buildings – probably the worst inventory in the country – to get into the action. About 18% of Winnipeg’s 15,994 condos are rented out and the 3,000 rented condos are achieving the highest rents in the city, averaging north of $1,200 for a two-bedroom. More than 30% of Winnipeg condos sell for less than $200,000 and the average was $249,000 in October.
Major Point: From June 30, 2015 to June 30 2016, Manitoba’s population increased by 22,147 people, or 1.7%, a growth rate well above the national average of 1.2%. This included a record of 17,228 immigrants to Manitoba, the vast majority of who moved into Winnipeg. Manitoba has one of the most generous business immigrant programs in the country.
Four-Plexes Hold Key To Victoria Rentals
Victoria is maturing into one of the best rental investment markets in B.C., which really means in Canada. The city’s vacancy rate is 0.7% and will stay at that level for at least two years, per Canada Mortgage and Housing Corp. and average rents have nowhere to go but up from the current average of $1,200 for a two-bedroom apartment ($925 for a one-bedroom.) Students, employees in the high-tech sector, and seniors, drive rental demand. Net migration for people aged 16 to 25 has added 18,000 since 2006, representing the largest single group of migrants to the region. Many of these are university and college students or are working in the city’s burgeoning high technology sector, which now employs 23,000 people.
(A recent study showed there were 338 technology companies in Victoria and tech firms now lease more office space than government, which is saying a lot in a capital city.)
Adding to that is demand from seniors and downsizers seeking rentals in Canada’s most popular retirement market.
There is a very active short-term rental market that now runs for at least two seasons. There are no AirBnB restrictions or foreign-buyer taxes as in Metro Vancouver!
- Older rental apartment buildings are selling for an average of $185,000 per-door but this price is trending up, according to Colliers. Capitalization rates for multi-family properties are in the 4 per cent range.
- The best bet is to buy an older four-plex, duplex or small apartment block, though inventory is tight. Look in Saanich, Sooke and Esquimalt and check investment listings at forsalevictoria.com.
- Resale condominiums are selling for an average of $394,500, up 18% from last year and are difficult to cash flow without an impressive down payment.
Major Point: Some say that construction of new rental units may flatten Victoria’s rental rate increases, but we doubt it. There are 25,000 rental apartments in the Victoria region but only 1,261 new units are under construction and half of these are in Victoria and another 25% in Langford. It will take a while for starts to catch up with demand.
New Mortgage Rules: Private Money Fills The Gap
Private money is stepping big time into the mortgage market as buyers try to get around the new rules for insured mortgages. Buyers can make a 20 per cent down payment that qualifies them to take out an uninsured mortgage and they are turning to unregulated private loans to enable them to make that payment.
“A lot of private money is flooding the market right now,” said Kyle Green, an ace Vancouver mortgage broker with Mortgage Alliance Meridian Mortgage Services Inc.
“[The new rules] push Canadians into private second mortgages, and it’s just costing more and more money for these people,” said mortgage broker Mark Cashin, who has arranged such deals and expects to see more under the new rules.
Private second mortgages typically charge between 7% 10% in interest, which is why there are more investors getting into the action.
“It’s not a good option but maybe it’s the only option we’ve got,” said Ron Alphonso, a private mortgage lender and mortgage agent who arranges home loans for borrowers who can’t get financing from mainstream banks. “It’s a way to get around the new rules,” he said.
Oliver pre-sale – 2BR,2.5 baths,1428 sq. ft.,5 decks, 5 appliances. It may rent for around $1400. condo fees about $165/month. Price: $294,000.
Italy votes on a bank reform this weekend. If it goes against the government, some banks could collapse. If you have money in an Italian bank, get it out now.
Austria votes this month…far right wing leading!
France’s conservatives elected a candidate this week that proposes a 39-hour work week (Ha-ha, he is really brave. The French have had 35 weeks and early retirement for years). France has not balanced its budget since 1989! But the generous world is getting close to say: No more! (Elections are next year.)
But our argument (originally gleaned from Martin Armstrong) that the world’s middle class is fed up with all things government is gathering momentum.
LATE LATE NEWS:
CMHC RELEASES FALL RENTAL REPORT:
Vancouver CMA: “Strong demand for rental accommodation in Vancouver outpaced additions to supply, pushing rents higher and vacancies lower for purpose-built and condo rental apartments.” The 2016 edition of CMHC’s Rental Market Report – Vancouver is now available and can be accessed by clicking on the link below.
About 140 residential property transfers valued at $115 million involved foreign nationals in Metro Vancouver during October, from a total of about 4,700 transfers valued at $3.6 billion. The 3% rate of foreign purchase is higher than September’s 1.8% rate, but still significantly below the 13.2% rate of foreign investment seen in Metro Vancouver before the Province implemented the additional property transfer tax.
VICTORIA INVESTORS NOTE: A THREAT IN THE PRESS RELEASE???
“The Capital Regional District, where the additional property transfer tax does not apply, saw about 6.3% of transactions (55 out of 879), representing 10.3% of the value of all transactions. Government continues to monitor this data closely.”
READ THEIR DATA HERE:
Property transfer tax data to Oct. 31, 2016: https://news.gov.bc.ca/files/Property_Transfer_Tax_Report_Jun_10_to_Oct_31_2016.pdf
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