Carolyn Ireland – The Globe and Mail

Toronto-based condo developer Alan Vihant was recently recounting how he visited Shanghai for a presentation to real estate investors.

One investor wanted to know about the prospective view from a building planned for the area near Yonge and Wellesley. If he purchased on the eighth floor, would he be high enough to see beyond a hulking building to the south?

Mr. Vihant is often astounded at how intricately buyers in China know the landscape and texture of Toronto.

“This is not from Google Earth,” he says of the on-the-ground knowledge investors possess.

Mr. Vihant, who is vice-president overseeing high-rise development at Great Gulf Group of Companies, told a round table of developers who gathered in Toronto recently for a Queen’s University seminar that he still sees opportunities.

Great Gulf does not disguise the fact that it sells to many foreign investors – not only from China but Russia and the Middle East as well, he says.

Many overseas investors have relatives who live here and many send their kids to school in Canada, he adds. They are professional investors in the sense that they often aim to build a small portfolio of 20 to 30 units for future income. “We cater to them.”

Developer and real estate agent Brad Lamb says the pace of building will not be as intense as it has been in the past 10 years, but he believes condos are the only realistic choice for many potential buyers in the Toronto market.

Rising prices have put single-family houses out of reach for many, he says, and banks have tightened their lending. At the same time, money is flowing around the world looking for a safe place to park, he says. “We’re now being compared to London and New York as safe places to put money.”

Mr. Lamb believes that population growth and the greenbelt around the city together will continue to exert upward pressure on prices. “It’s very hard for economists to understand that Toronto may not follow traditional metrics.”

Comment: Well, no. They all seem to ignore demographic shifts, for one thing. They stick to old yardsticks, even with proof that they are no longer valid (such as the old price-to-income ratio, whereas a newer monthly-income-to-monthly-mortgage-payments ratio is much more meaningful).

But as Toronto’s inventory of unsold condo units continues to expand, market watchers around the world are wondering how much longer the city’s real estate market will continue to draw investors.

Sales of new units fell 27% in the first nine months of 2013 from the same period in 2012. Even as inventory stands at about 23,000 units, building is intensifying, points out John Andrew, director of Queen’s executive seminars on corporate and investment real estate. He says buyers purchased about 3,000 units in three months.

Comment: New projects fell by 54% in Q1, there have simply been fewer new condos for people to buy, investors or end users. Note the upswing in resale condo sales, the activity has just changed categories.

“The inventory is just rising steadily,” Prof. Andrew says. “There’s a lot of construction still under way.”

Comment: Inventory stands around the historic 9-11% of a given project. This is the same as it has been for a decade or more. We are simply seeing more because of many more sales and many projects over the past 3-5 years. Especially back in 2011 when a record for new condo sales was set. So the percentage has not changed, even if the absolute number has. It is very important to note that the ratio is completely within historic norms.

Prof. Andrew reports that builders say they don’t put a shovel in the ground until 70% of the units have been sold – but he points out that that formula can still leave a lot of condos standing empty.

Comment: Many lenders are forcing builders to sell 80% now, before funding the project. And buildings still tend to complete with 90% sales, give or take. Same as it has been since the millennium.

“They try to sell that 30% while they’re building the building, but clearly that’s not happening.”

Comment: No, but clearly they are selling 20%. And the remaining 10% are rented out, sold slowly, or turned into guest suites. Remember, if they gave those 10% away, they still make 90% of their sales and thus 90% of their profit. And these are multi-hundred-million dollar buildings. Big ones can be $200 million to build, with $20 million in profits. Even if they only make $18 million, the builder is not exactly hurting.

Real estate agents say that investors who live in Canada are more hesitant to line up at builders’ sales centre and buy condo units from plans. In the past 10 years, anyone willing to put a down payment on a unit and wait would be rewarded with a nice profit if they sold as soon as the building was complete.

Comment: Anyone buying any real estate and then selling it 5 years later would see a nice profit. Toronto prices have risen 23% since 2010 alone!

But as land prices have risen and unit sizes have shrunk, the early investors no longer stand to make money.

Comment: But most investors are not in it to flip it, we all know that now. They are looking to rent their unit(s) out for years and make money that way.

Prof. Andrew points out that buyers who wanted to live in a luxury condo had little choice but to purchase from plans and wait three to five years until it was built. Now that so many units are completed and sitting empty, they can walk through and move in right away if they decide to buy.

“There’s a huge advantage now to seeing what I’m getting – I can feel the carpet and touch the light fixtures and see the gymnasium and the other amenities. That’s a great feeling.”

He’s even more alarmed that no one has a really good handle on the percentage of units being purchased by overseas buyers. Investors are more likely to bail out of the market in the event of a downturn, he points out. “They’re the first to dump them when mortgage rates go up.”

Comment: What does it matter? Are we going to have this racist discussion again about foreign buyers? Why would they sell, they are buying with cash or with massive down payments. Increasing mortgage do not affect them in the same it would a first time buyer 5% down. Foreign buyers must have 35% down to get financing. They are also in it for the long run, they are really not concerned with blips. No one expects mortgage rates to rise significantly in the future, no one except doomsayers. With $100,000 down on a $300,000 condo, their mortgage payment is only $1,000 a month. And the average rent for that unit is around $1,800. Even if rates jump from 3.59% to 6%, their payments only increase by $280/month. That is not going to cause a smart investor to suddenly jump ship and fire sale their unit(s).

Foreign investors have even less incentive to hang on, he says. Even those who paid in cash will not necessarily hang onto a money-losing investment.

Comment: Wait a second… if they paid all cash, then they only have to pay condo fees and property taxes, maybe $600 a month total. And they can get $1,600-1,800 in rent for a small condo. How would it make sense for them to dump a unit that is generating $1,000 month in positive cash flow?

Mr. Vihant of Great Gulf says that builders need to sell a lot of units within the first couple of weeks of launching a project. “If you don’t get that velocity early, it’s difficult to get your financing.”

He is looking beyond residential real estate in Canadian cities to other markets: Washington, D.C. is one city poised for more development, he says. Great Gulf is also undertaking commercial development. “When you look at the cranes in the sky right now in Toronto, they’re not all residential.”

Comment: No… but, 95% of them are. Mind you it is nice to see commercial development downtown. Companies are realizing there is a huge employment pool downtown and they are looking to take advantage of it.

David Feldman, president and chief executive of Camrost Felcorp Inc., says investors are still buying. His company is seeing strong sales at such projects as the redevelopment of the former location of the Four Seasons Hotel on Avenue Road in Yorkville.

Many new buyers and current owners will be the landlords of the future and Toronto needs those rental units, he says. “I feel very bullish. You’ve got to be cautious. You’ve got to be priced right.”

Prof. Andrew says that a recent rebound in condo sales may be short-lived. He attributes some of the bounce to buyers who may have been trying to secure a deal before mortgage rates climbed too high.

Comment: They may have been, but rates rose 5 months ago and have held steady since. Yet November sales are still up 21% in the middle of the month. And condos keep selling, either new or resale. If one rises, the other falls. If a ton of new condo projects are launched, resales will fall. But the overall volume stays steady. And heck, people have been calling for the collapse of the Toronto condo market since 2003 – it ain’t happened yet!

November’s results may be disappointing, he adds. “Now mortgage rates have come back down and the panic is gone.”

Comment: So again the economists and experts were wrong, mortgage rates did not hit 10% and cause the market to crash.

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.
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