Facts By Email #19: Coquitlam boosts DCCs as towers soar

IN THIS WEEK’S FACTS BY EMAIL:

• HOT PROPERTIES:
  – 4 PLEX IN PHOENIX $265,000
  –  GRAYS HARBOUR WA, BUILDING LOT $15,000
• MULTIFAMILY ACTION HEATS UP IN SUBURBS
• HIGH PRICES OFTEN LINKED TO LAND VALUES
• COQUITLAM BOOSTS DCCS AS TOWERS SOAR
• BUYING A PRE-SALE ONLINE: WHY?
• REBUILDING FORT MAC –  A $10 BILLION PROJECT
• BIG BOYS BID UP PHOENIX APARTMENT VALUES
• CROWDFUNDING FOR REAL ESTATE: BC HAS NO CAPS
• BC DEALS WITH SHADOW FLIPPING
• NEW MORTGAGE RESTRICTIONS COMING IN NEXT 2 MONTHS

Questions, Questions – And Comments

Comment: Personally, I like your discussion on oil, Canadian dollar, even comments on stock markets. I really like your view of the world and am continually surprised at your acumen. I understand your concern. You are a real estate adviser not professing to be anything else, but I like the way you tie your views on all investments into the outlook for real estate market. Keep it up.

A: Blush. Thanks, much appreciated.

Q: What is the difference between shadow flipping and simple contract assigning?

A: The BC Real Estate Association made a comment on the new BC government legislation on shadow flipping (press release below). The Government makes it clear that the practice of assignment of a contract with permission from the owners remains legal.  From press release:

“Contract assignment fulfills a legitimate role in real estate transactions, and in certain situations can protect consumers if their circumstances change during a transaction. The changes we have made empower sellers by providing for full disclosure, informed consent and the opportunity for sellers to insist they receive any resulting financial benefit. If the prospective buyer wants to remove these terms from the offer, the buyer’s licensee must notify the seller that the terms have been removed from the offer. The seller has the power to reject the offer and insist on one or both of the terms. Sellers must be advised to seek independent professional advice. Sellers licensees are also required to discuss with their clients whether the proposed contract would be assignable and whether there would be any conditions on assignment, including whether the seller is entitled to any profit.”

Q: I read your piece on Hong Kong with interest. Is there any similarity to Vancouver? What triggered the Hong Kong sharp downturn in real estate prices?

A: We featured the downturn 2 months ago as well. There is no direct factual correlation between Vancouver and Hong Kong that I can see – other than this anecdotal one: To the extent that Hong Kong prices have been driven by Mainland Chinese speculation (if), and to the extent that the Mainland Chinese have withdrawn (if), there can be drawn this correlation: If the Mainland Chinese speculators in the Vancouver market leave for (what they perceive to be) greener fields (if) … we will have a sharp decline as well.

Coquitlam Boosts DCCs As Towers Soar

Coquitlam is extending its development cost charges (DCCs), which began in the booming Burquitlam area, to the entire city. The change, coming soon, will add $3 per square foot to new condos, based on the additional square footage allowed through rezoning.

Single-family house developers will pay a fee of $5,500 for all lots greater than 4,036 square feet (375 square metres), while smaller parcels would pay $4,800.

Unlike the community amenity contributions used in Vancouver, the Coquitlam charges will be universal, not based on a project-by-project basis. However, like Vancouver, they are meant to capture some of the land lift value after a rezoning is processed.

Major Point: There is a lot of development going on in Coquitlam; last week the tallest condo tower ever built in the community opened. Cressey Developments’ M3 tower soars 48 stories in the Coquitlam town centre area. Prices have been raised in some of the Burquitlan new development to over $590 per sq.

Multifamily Action Heats Up In Suburbs – Maybe Time To Cash Out Or Joint Venture

Old, low-rise rental apartment buildings in New Westminster are now selling for around $160,000 per door and for upwards of $440,000 per door in Burnaby’s Metrotown. Prices are also rising in Surrey, Langley and as far out as Abbotsford as the blast radius from Vancouver’s multi-family boom continues to spread. Toronto-based Canadian Apartment Properties REIT, which bought a portfolio of 19 suburban apartment buildings in Metro Vancouver last year, and Calgary-based Mainstreet Equities Corp., which has locked up about a third of the Surrey and Abbotsford apartment rentals, and investors from China – who are leading the charge in Burnaby – are indications of how competitive the suburbs have become for local investors, and how lucrative for existing landlords.

This year, Metro apartment building sales could surpass $1.5 billion, up from $936 million in 2015. The big mover is Burnaby, because the city has no restrictions on replacing apartment suites when an older builder is torn down (unlike Vancouver). Many Burnaby sales, especially in the Metrotown, Lougheed centre and Brentwood area, are pure offshore-investor land speculation plays, which drives up the per-suite cost. (Burnaby accounted for 47% of total suburban apartment building sales last year). Watch for the land value speculation to build in both New Westminster, Langley and North Van:

New West properties with views or close to one of its three SkyTrain stations;

Langley because of the LRT extension from Surrey (coming likely by 2018-19) and its increased stature as a retail hub.

The North Van action will be concentrated in Lower and Central Lonsdale (views) and in Lynn Valley (town centre development).

Last year, nine Langley apartment buildings sold for $85 million, with per-door prices above $110,000. New Westminster saw 22 buildings sell for a total of $249 million and the average building sold for $10 million in North Vancouver.

Major Point: If you are a long-term landlord holding an older suburban apartment building in Burnaby, New West or North Vancouver with development potential, you have two options:

• cash out now or
• joint venture with a developer.

The future is not in renting old apartments for $850 per suite, it is in the land value. If you own in White Rock, Coquitlam or South Delta, hold on for two more years because prices will rise enough to make it worth the wait (arrival of Evergreen transit and the new Fraser River bridge).

In Vancouver west (where per-door prices are peaking at $600,000 in Kerrisdale; $345,000-$400,000 in Kitsilano and the West End) this is the time to be selling.

Also a warning to small landlords: we hear footsteps in B.C.’s rental legislation. The BC Housing Minister pledged in March to “crack down on bad landlords” which will likely translate into higher costs and hassles for those landlords with the most affordable rentals.

Buying A Pre-sale Online: Why?

Vancouver condo developer Pennyfarthing made a media event this week over the ability to pre-purchase one of its 58 new Grayson townhomes on Cambie Street through the Internet. The pitch: buyers can avoid the lineups and bustle by clicking through the condos, selecting their trims, and paying for it all online.

We suspect two things: first, it is aimed squarely at the offshore market for buyers who can’t take the time to fly into Vancouver to actually look at a site they are buying for $1,000 per square foot. Second, it doesn’t make much sense and is largely a marketing gimmick.

Major Point: We would not recommend anyone buying any real estate, even pre-sales, without at least visiting the site, walking the neighbourhood and getting advice from a third-party realtor.

We also have no doubt that all the Grayson units will sell out in this market, online or otherwise.

Big Boys Bid Up Phoenix Apartment Values

As faithful readers know, members of our Real Estate Action Group as well as many of you, dear readers, have been investing in the Phoenix rental housing market since 2010. But now the big boys are moving heavily into Arizona’s biggest city – and helping to drive up prices. This month, for instance, Institutional Property Advisors, a division of real estate investor Marcus & Millchap (M&M), paid US$64.5 million for a 28-year old, 472-unit Phoenix rental complex. That pencils out to US$136,000 per door, much higher than our REAGies have been paying in recent years.

But M&M is buying for the same reasons: it notes the purchase is ringed by employment, including a heavy concentration in the health-science field, such as the 35-acre St. Joseph’s Westgate Medical Center. Also nearby are Luke Air Force Base, Honeywell, Humana Healthcare, Midwestern University, Conair Corp. and the Thunderbird School of Global Management.

Major Point: Prices in Phoenix are rising, up about 20% in the past year, but the city is among the fastest-growing U.S. cities with robust employment that is drawing workers – and tenants – from across the country. There is still room to make profit in Phoenix rentals. Keep looking for the nuggets – or get on the mailing lists.

Rebuilding Fort Mac A $10 Billion Project

Fort McMurray, which has been taking the brunt of Alberta’s real estate downturn, will, ironically, represents a huge real estate construction investment as it rebuilds from devastating wildfires. Early estimates put the insurance claims at $9 billion – the highest of any disaster in Canadian history – but that could easily rise once the smoke has cleared.

Not all the city of 88,000 has burnt: the airport, the water works system, the downtown and some residential subdivisions, such as Timberlea, remain intact. But at least 2,000 homes are gone, as are scores of commercial buildings. Syncrude, the biggest oil producer, shut down for the first time in its history this week – more than one million barrels a day are offline – but will be coming back online as soon as possible, which means workers will be eager to get back to town.

We talked to oil sands workers this week who had evacuated to Edmonton and were awaiting a signal to return. Once the fires are out, crews will have to shut down all the natural gas lines in the city and do a lot of other preparation before people are allowed back in. Figure at least three weeks, maybe a month.

Major Point: Please note, that the big fire in Kelowna a few years ago, also saw huge parts of that city destroyed, but much of it was rebuilt better and bigger than before. It will depend on what the insurance payouts will be. Ft. McMurray real estate was in a sharp downturn before the fire. Maybe some will take an insurance payout and not return. Overall though, Albertans are hardy, hardworking lot and we have no doubt the rebuilding of Fort McMurray will start soon and go bigger and better than ever. The city once again offers great real estate opportunities, now as the biggest redevelopment play in Canada.

Ceiling Heights Challenge Mixed-use Developers

Condo buyers demanding nine foot or higher ceilings are throwing a wrench into low-rise mixed-use developments, because of height restrictions in many parts of Metro Vancouver.

With buildings often restricted to four stories, there is less room for commercial space, which require high ceilings, explains architect Peter Odegard, of MCM Partners. Odegard said that mixed-use buildings are one the most difficult to design.

“Compromise is the key word with mixed-used,” he said. “When approaching a project, we always start with designing retail before residential because it’s easier to make changes to homes. But in the commercial spaces, once you’ve made the decision, it’s much harder to fix – if you’re able to fix it at all.”

For developers, having the tenants already secured is essential before architects can design the project. From ceiling heights to plumbing needs, some retailers, in particular restaurants, have very specific requirements in order to operate. “Squeezing [in] three levels of residential does not leave enough ceiling height for the retail level,” explained Derick Fluker, a principal with Form Retail Advisors.

 “[Low] 12-foot foot ceilings eliminate 80 per cent of retail,” said Daniel Lee, principal at Northwest Atlantic. “Tenants need high ceilings for things like equipment and lighting. “He said municipal planners often don’t understand that height caps limit economic development.”

Major Point: Unlike a residential tower, there are a number of factors that architects need to consider when designing mixed-use. This includes loading access for suppliers, ample parking for customers, access for residents and concerns such as trash, smells, and noise, which must be addressed in the overall design.

Saskatoon Rental Vacancies Double

Apartment rental rates in Saskatoon did not increase last year for the first time in 26 years as a glut of new inventory drove rent levels down – and vacancies higher – in older apartment buildings, according to a report from Colliers International.

In the past five years, 2,000 new rental apartments have been built in the city, half of them as student rentals. This has left owners of older apartments – the average age of their buildings is 49 years – scrambling to retain tenants.
“In order to attract the limited pool of potential tenants, free or discounted rent periods are being offered,” the report found.

Major Point: The rental vacancy rate has spiked from 3% in 2014 to 6.3% and is expected to rise further this year.
Owners of older apartment buildings could do upgrades to make their units more competitive, but they are fighting for a decreased tenant pool. In-migration to Saskatchewan, which had been averaging a net increase of 10,000 people per year from 2008 to 2014, fell 70% per cent in 2015.

Crowdfunding Real Estate Coming To BC

Real estate crowdfunding is coming to B.C. and it could get big.

We are not talking about the recent overseas investor group that reportedly raised $60 million in two hours mostly through Facebook to buy two West End apartment buildings, but the regulated, legal fundraising that is widely used now in the United States. In the U.S. most of the crowdfunding is being used to buy short-term residential investments.

More than 175 real estate crowdfunding portals are active in the U.S. and huge sums have been raised, with rates of return as high as 8-25% and minimum investments as low as $100-$5,000. FundRise claims 80,000 members and to have made US$3 billion in real estate investments. Realty Shares has raised US$130 million for 160 properties and Realty Mogul has raised US$196 million from 78,000 investors.

More than $2.6 billion in global real estate projects were crowdfunded in 2015, up 156 per cent from 2014.
In Canada, Toronto-based Nexus Crowd recently bought three industrial projects worth $12 million raised through crowdfunding.

Major Point: In 2015, a new prospectus exemption was introduced in B.C. called the Start-up Crowdfunding Exemption. Project owners can raise a maximum of $250,000 in capital twice annually and retail investors can invest a maximum of $1,500 per campaign. While the caps are modest, the exemption opens up previously inaccessible investments to regular investors.

Major Point: People close to crowdfunding note there is inherent risk since crowdfunding is associated with smaller real estate developers and less established investors. As one lawyer said, “Why would a reputable real estate developer need crowdfunding when banks are lending at 2%?” Why indeed?

BC Brings In New Legislaton To Stop Shadow Flipping

As of May 16, 2016 the BC government will require contracts prepared by real estate licensees to include clauses stating that the contract cannot be assigned without the written consent of the seller, and that any profit from an assignment goes to the initial seller. Clients can instruct licensees to omit or change the clauses.

“Real estate consumers now have a tool to help them decide whether they want their contracts to be assignable,” says BC Real Estate Association (BCREA) President Deanna Horn. “Like many other provisions in the contract, buyers and sellers have the option of keeping the new paragraph, changing it or striking it out completely—but at least the conversation is more likely to happen now.”

BCREA supports the new requirements. To help consumers and REALTORS® with the transition, the Association is adding the following paragraph to the residential and commercial Contracts of Purchase and Sale:

The Seller and the Buyer agree that this Contract:

(a) must not be assigned without the written consent of the Seller; and
(b) the Seller is entitled to any profit resulting from an assignment of the Contract by the Buyer or any subsequent assignee.

“Assignment” is the practice of someone assigning their rights in a contract to someone else before the transaction completes. In simple terms, someone can buy the right to step into the original buyer’s shoes to complete the contract. Assigning one’s right to a contract is a legitimate practice, allowed by common law and also by section 36 of the Law and Equity Act.

Mortgage Rates

The Department of Finance has been working to promote “private market funding sources” to decrease CMHC’s (government owned) exposure to the mortgage market. This has created a swath of new restrictions on mortgage securitization (the bundling and selling of mortgages after they have funded) which seem to be coming out every 6-12 months.  There are three more changes coming in the next 2 months:

• Higher fees for lenders using government guaranteed mortgage-backed securities (called MBS)
• Requirement to securitize bulk insured mortgages (mortgages where the borrower put more than 20% down but the lender insures and sells to get off their books for mainly accounting or liquidity reasons)
• Restrictions on securitizing mortgages in non-CMHC guaranteed securities.

Other than costs increasing, this could also affect smaller non-bank lenders who don’t fund enough volume. “I saw this news come out today, and it explains why last week one of the largest non-bank lenders First National changed policy and only now offers 5 year terms for rentals,” says Kyle Green of Mortgage Alliance (604-229-5515, Kyle@GreenMortgageTeam.ca). “For the smaller lenders, they may not fund enough on short term rates to be able to bundle up and securitize the loans, so they may not offer competitive short term rates or want to offer them at all. This is unfortunate as right now, we have really been promoting short term rates since the variable rate discounts aren’t great right now,” adds Green.

Major Point:  The new guidelines come into play in July but as usual, banks will begin making adjustments ahead of schedule and if previous announcements are any indication, banks will likely over-correct and then get back to normal a few months afterwards. Rates may go up a bit in the summer. Get pre-approved!

May 9, 2016

Hot Property

WONDERING ABOUT THE HOTLINE?

We can text you every time that the Hotline has been updated – with the password and no. E-mail (max@jurock.com) your cell phone number or call the office at 604-683-3222 and we will add you to the list.

To subscribe to Jurock’s Facts by Email 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.