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Over
the last 25 years, we have seen many cycles in the multi-family
industry in Ontario. Recently, there has been a significant
rise in the demand for multi-family assets. In fact,
the desire to acquire properties has been steadily increasing
over the past 10 years. This increased demand has made
it difficult for investors to acquire new properties.
This competitive market has prompted landlords to improve
their internal efficiencies, reinvest in their assets
and improve levels of service, all while offering the
product to tenants at competitive prices. This situation
can be attributed to many factors: strong economic growth
in Canada; a sustained lower interest rate period, only
enhanced by a CMHC insurance program allowing for stronger
yields through leveraged investment and refinancing;
a strong rental market with generally increasing rents;
and, Government policies supporting free market-based
pricing.
On
the legislative front, current legislation has given
landlords the opportunity to improve and upgrade their
properties and for developers to be able to build new
rental properties with the ability to charge rents that
the market can bear. This allows landlords/developers
to make economic sense of the entire process. This formula
which provided for better living standards at a reasonable
rate has resulted in immense growth in the sector altogether.
With
these incentives, Institutional, National and International
investors flocked to the multi-family sector offering
service quality and professionalism in a healthy market.
At the September 2004 Apartment Conference in Toronto,
Mr. Mitchell Abrahams - former VP of GWL Realty Advisors,
in charge of acquisitions of multi-family properties
addressed the landlords in the room (about 500 strong).
"You should all be commended on what you have done over
the past 5 years. You have improved your properties,
reinvested in your assets, and, offered a better product
and service to tenants, you should all congratulate
yourselves".
The
above clearly demonstrates how the multi-family industry
has achieved a new level of professionalism. All investor
categories have been actively pursuing and investing
in multi-family properties. Pension funds, insurance
companies, REITs, public entities and large private
investors (domestic and International) are all part
of the fold and current attractive market attributes
must be maintained in order to keep investment of such
groups in this sector. Otherwise, investment managers
will look to other investment types for their desired
returns.
Perceived
changes, however, may put this all at risk. Mr. Alf
Hendry, CEO of Homestead Land Holdings Ltd. one of the
countries largest landlords owning close to 20,000 units
says, "the perceived changes to the current TPA only
adds another level of uncertainty to the construction
process when Government changes the rules and regulations
that are currently in effect". Obviously this uncertainty
creates risks which must be considered by investors/developers
when making their investment
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decisions.
Mr. Hendry further says, "But I am happy to see that
all three levels of government seem to be working together
to create a better situation. The Liberal Government's
intention to inject more funds towards affordable housing
projects is very positive".
"Growth
has been strong over the past 5 years especially, but
I doubt it will continue" says Mr. Luigi Caparelli,
President of the Eastern Ontario Landlord's Association
and currently President of Gold Key Management. "Proposed
changes are going to make it difficult for landlords
to earn the profits they require. The prices that you
need to pay to buy new properties is still rising while
your operating costs are all going up, I just do not
see the growth continuing".
Most
recently, Ontario landlords have seen revenue levels
starting to decline without any government intervention.
Mr. Paul Fish of the Altus Group research shows that
markets across Canada are experiencing increased vacancy
rates. In Ontario, we have seen the availability of
rental units increased to approximately 5.96% in Toronto
and 8.76% in Ottawa, according to the latest Altus Group
and CMHC reports on vacancy and availability.
But
what does all this mean?
Shrinking
revenue levels, more competition in the market, construction
of new condominiums and new homes are being marketed
to renters and the fear of pending legislation changes
has all made investors more cautious. Mr. Jonathan Krehm
a principal of O'Shanter Development Co. Ltd., which
owns and manages over 1200 units in the GTA says, "Investors
have to be very careful buying properties".
These
sentiments are echoed  throughout
the multi-family investment community by most investors
but not by all. International groups such as El-Ad,
Fishman Holdings, Lencore Estates and other International
investors as well as some domestic investors continue
to be very bullish on the Canadian apartment market
and continue to acquire assets believing that there
are still opportunities in the multi-family sector.
They are focused on finding assets which still have
strong upside potential and can achieve their desired
yields.
Whatever
their investment philosophy is about the future, most
landlords will agree that legislative changes, if any,
should not focus on creating disincentives to landlords
but rather should focus on creating incentive programs
for all real estate development sectors. Landlords feel
this legislation would be better suited to create directives,
which would help to solve the more pressing issue of
affordable housing. The creation of a system based on
a free market economy with incentives to increase
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the
amount of available affordable housing stock would seem
more productive.This
could be provided through rent subsidies directly to
tenants as well as subsidizing developers to build more
housing across the province as indicated by the Liberals
current platform.
Tenant
advocates would say we need to do more. We must implement
legislation to allow for affordable housing. Mr. Bob
Dugan, market analyst, writes that the 2001 Census shows
that three quarters of a million renters are in the
low income category, earning less than $20,000 per year
per family. The housing stock for these types of renters
requires product in the $500 range and less and it is
in short supply across the country. So what is the answer?
Most
industry professionals agree that we need affordable
housing and most landlords would support that there
is a need, but the problem must be addressed in a more
proactive way.
Current
market activity in the multi-family sector is performing
very well in a free-market economy offering good product
at fair prices. So why would anyone consider changing
an excellent working relationship for both landlord
and tenant - if it is not broken why fix it?
Mr.
Berend Koopmans, President of Lynwill Real Estate Corp.,
owner and manager of nearly 2000 units all over Ontario
says, "the proposed legislation is a lose-lose situation
for all". He adds, "the only thing it seems to encourage
is the professional tenant - those who take advantage
of and abuse the system and legislation. It does nothing
to address the key issues in the industry: affordability
and construction of new accommodations. It will result
in loss if jobs, poorer quality properties, and will
discourage future investment in buildings".
Should
the suggested legislative points be implemented, the
overall consensus is that potential investors should
be very careful when investing in the multi-family market.
Politicians should concentrate on what is needed in
the housing industry; construction programs; incentives
for builders and landlords alike to create jobs; continued
investment; and, an overall healthy economic environment.
Keeping both institutional and International investment
in the multi-family sector insures that the professionalism
that has been achieved will be encouraged to continue.
Trusting that the Politicians will do what's right for
all involved and not only be concerned with what will
win them more votes. They should concentrate on legislation
that works.
What
legislation will ultimately be implemented and how it
will affect the multi-family industry has yet to be
determined. But time will tell!
Aik
Aliferis is a Co-founding Partner of Primecorp
Commercial Realty Inc. specializing in the sale
of multi-family properties having been involved in the
sale of over 10,000 units in the past 10 years in more
than 20 different markets.
Toronto
- Montreal - Ottawa - Halifax
aaliferis@primecorp.ca
1-888-720-2020 ext. 234
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