On page 16, I share my thoughts on Cap Rates, and Commercial Real Estate Investment Analysis.
Soaring household debt, and in some markets, continued runaway house prices, have led Moody’s to downgrade debt and deposit ratings for Canada’s major Banks. Read the complete story here. The article states that our major Lenders have Capital and Liquidity safeguards in place. However, high levels of consumer debt leave lenders vulnerable to losses.
Further to our recent post entitled Retail Real Estate. Whats In Store, you’ll find the attached article from The Atlantic magazine very interesting I’m sure. The shift to eCommerce, the over supply of shopping malls, and changing consumer buying habits are changing the retail real estate landscape significantly.
You’ve likely heard of a mortgage loan being referred to as “good debt”. It is generally accepted wisdom that you want to borrow against appreciating assets like real estate. And it’s best to avoid excessive debt against depreciating assets.
Here is a terrific example of arguably the world’s most successful investor, employing “good debt” technique. See if you don’t agree.
Fresh on the heels of our recent post on the benefits of considering a Line of Credit for your real estate financing needs, entitled Lines of Credit 4 reasons why they might be the right option for you, Manulife Bank has just released a new product.
Available through their Broker channel, its a re-advanceable equity Line of Credit. It’s particularly well suited for investors in smaller rental properties.
The LOC allows for a maximum LTV of 80%, and maximum loan amount of $750,000. The product is designed for financing both owner occupied and non-owner occupied rentals. A Beacon score of 700 is required for qualification and the rate is competitive, at Prime + 0.70%.
As stated in our previous post, LOC’s are a terrific product, particularly for property acquisitions. Check out the product here, and speak to your Broker about its suitability for your needs.
The Q4 Cap Rate Update compiled by CBRE suggests that change was the operative word for Canada’s major real estate markets as 2016 drew to a close.
As we’ve grown accustomed to over the past year or two, real estate demand and prices continue to show growth in both Toronto and Vancouver. CBRE’s Canada Cap Rate Report Fourth Quarter 2016 summarizes these trends and reports that Toronto saw several large transactions reflective of sub 5% capitalization rates in several major asset classes.
Vancouver was a similar story. Office assets are trading at or below 4% cap rates. The real surprising story was that there were several apartment trades in the previously untouched 1.9% to 2.3% range. It’s hard not to think that this market will need to take a pause and catch it’s breath.
Real Estate activity in the two major Alberta markets at year end, was reflective of the increased and ongoing sense of economic uncertainty. Cap rates ended the year either stable or increasing in these two markets. Office markets were particular hard hit as leasing uncertainty/risk continues.
Flying under the radar perhaps, are indications of increased investor interest in hotel properties. Cap rates for both limited and full service hotels are stable or declining in all major markets. Undoubtedly our low dollar is an attraction for foreign visitors.
Real Property Record Keeping in Ontario has just changed. This one largely flew under the radar, however rules have changed for Ontario Corporations effective December 10, 2016.
New pieces of legislation have been enacted, namely the Forfeited Corporate Property Act, 2015, and the Escheats Act, 2015.
As a result, all Ontario Corporations will need to “prepare and maintain at its registered office a register of its ownership interests in land in Ontario”.
As a result of this new legislation, going forward, reporting will require that Corporate landowners list the following information:
Why the new legislation? The Province wishes to ensure that for Corporations involuntarily dissolved, the Province (Crown) can identify lands which are/should be forfeited to the Crown.
Speak to your Accountant or Lawyer to fully understand your go-forward obligations. A good primer would be the recent article authored by Danny Giantsopolous entitled Corporate Property Interests: New Ontario Record Keeping Requirements Scheduled To Take Effect Imminently.
Know your obligations!
In these global slow growth periods commercial real estate investment and lending has become a preferred option. Predictability of income is key. Domestic investors and international capital continues to favor Canada as a haven of political and economic stability. As a consequence, investment grade real estate has performed exceedingly well in Canada. According to CBRE’s 2016 Canadian Real Estate Lenders’ Report, Canada is poised to set a new single year record for investment real estate sales volume in 2016.
Domestic and Canadian Banks, Credit Unions, Life Co’s and Pension Funds, as well as private Debt lenders were surveyed by CBRE. Some interesting trends and shifts are emerging:
-While 58% of lenders surveyed intend to increase their allocation to commercial real estate lending in 2017, an increasing number are satisfied with their current exposure.
-In 2015 there was no clear preference, but in 2016 there is an increasing preference for fixed rate vs. floating rate lending.
-There is a clear preference for lending in Tier 1 markets. Increased Loan-to-Value ratios are available in those markets, for high quality transactions.
-Secondary market lending increasingly requires a 15 to 20 bps rate premium.
-Vancouver and Toronto accounted for 61% of investment activity in 2016, however only 68% of lenders are keen to lend in Vancouver next year, vs. 80% in 2016.
-Ontario is the clearly the preferred lending market for 2017. Hamiliton, Kitchener/Waterloo, London, and Ottawa were identified as likely to benefit from increased lender activity. Not surprisingly 84% of lenders surveyed expressed a strong desire to lend in Toronto.
The key determinant of lender activity however, is asset class. According to the CBRE report, it is the driving consideration for lending activity for 71% of surveyed lenders. Industrial and multi-family properties are the clear favored property types. Lenders are poised to increase their allocations in these asset classes. In fact industrial real estate was the only asset class that had increased allocations by lenders, year over year.
Of less interest to lenders are office buildings (where there has been a run-up in values in major centres), and retail properties (which are increasingly being affected by shift in consumer preferences due to technology). Condo construction financing has also fallen out of favor. Only 5% of surveyed lenders looking to expand this book of business in 2017.
New Mortgage Rules are in place to cool down the housing market. It’s now more restrictive for some borrowers to obtain financing. In a nutshell, here are the 4 points you need to know:
3. Risk Sharing. The Feds plan to enter into discussions with lenders in respect of risk sharing. Stay tuned.
4. Foreign Buyers. The Feds intend to address what may be a misuse of the principal residence exemption by certain buyers. The new rules require the individual to be a Canadian resident in the year the house was acquired, in order to claim the exemption.
Broadly speaking Fintech (Financial Technology) firms deliver financial services in the area of transaction processing, data gathering, wealth management, and importantly for real estate investors, lending services.
Interestingly Fintechs are both competing with, and in some cases providing back office or administrative services, or product/delivery solutions to more traditional lenders.
A tremendous amount of press has been devoted to Fintechs, due in large measure I suspect to the rapid growth of the industry, and the tremendous valuations of some participants.
I have been told that the quote is neither accurate, nor Chinese, as is often suggested, but for what it’s worth “May you be cursed to live in interesting times”.