Wealthy Asians are such a powerful buying force in the Global real estate markets.
Speculators, foreign investors, betting on Toronto condo market
Garry Marr, Financial Post · May 21, 2011 | Last Updated: May 20, 2011
http://www.financialpost.com/news/Specu ... story.html
Who in their right mind would invest in something that loses money every month? The answer just might be future Toronto condominium buyers.
Toronto is the largest condominium market in North American with 18,000 suites selling annually over the past five years, according to research firm Urbanation Inc. The problem is rent for those units is not climbing much, stuck at $2.09 per square foot in the first quarter of 2011 versus $2.09 per square foot a year earlier.
Rental rates are relevant because Toronto’s condominium market has quickly become an investor market with Urbanation saying more than half of the units in the city are now being bought by people who have no plans to live in them.
What it could mean is negative cash flow for anybody buying in the future and hoping to rent. Ben Myers, executive vice-president of Urbanation ran down the numbers for new buildings being sold now which are asking as much as $550 a square foot.
Take a 750 square unit. If you are going to buy the unit for $550 per square foot, that’s $413,000. You put 25% down and you have a mortgage of $310,000. Based on variable rate mortgage at 3% with a 25-year amortization, your monthly payment is $1,475. Add monthly fees of $345 for condo maintenance and $345 for property taxes and you are up to $2,200 in costs.
Newer buildings in Toronto are generating $2.26 per square foot but even at that rate, it only generates about $1,700 per month. Your unit will lose $500 or $6,000 per year, though you would knock of about $45,000 in principal over five years.
“What is going to happen to those buildings when they come on the market? If rents are not any different, are we going to have a major exodus of investors in the market?” says Mr. Myers.
Even the Canadian president of Monarch Construction, which builds high-rise condominiums, questions whether it all makes sense.
“From an investor perspective, it’s not a great investment. This is all about capital appreciation,” says Brian Johnston. “Investors are a big part of the market, it’s 40% or more for us and that’s higher than in the past. It’s mostly Asian investors.”
The influx of foreign buyers is one that Vancouver has almost gotten used to it with commentators suggesting Asian investors have made it the most expensive city in Canada to buy property. Average prices in Vancouver in April soared $801,252, a 21% increase from a year ago.
For some people, buying a condominium is a short term bet. Developers can require up to 25% down on a property but the rest of the cash isn’t due until the building is occupied and later registered.
There could be a three-year gap before you have to come up with cash. If you park $100,000 on $400,000 for three years and it appreciates 10% per year, you are going to pocket more than $130,000 in profit not including costs of selling.
“There has been appreciation in the past but will there be as much going forward?” he said, adding even at 3% appreciation, the investment might work.
But increasingly there are foreign investors in the Toronto market who don’t even care about the appreciation or cash flow issues because they are buying units outright, says Mr. Johnston.
“Look up at some these buildings downtown and look and you’ll notice how many dark units there are,” he says, noting some investors are just happy to leave them vacant.
Benjamin Tal, deputy chief economist with CIBC World Markets, said there are two factors which could help investors. Rental rates should rise as the housing market slows and demand increases.
The other issue remains how much room there is for price appreciation and Mr. Tal says plenty based on foreign investment which is driving the market.
“I cannot think of a more sustainable trend than China growing and Chinese money entering Canada,” says Mr. Tal. “People say it’s crazy, crazy, but it’s the most sustainable trend I can think of.”
There are plenty of naysayers still out there, including Kurt Rosentreter, a certified financial planner with Manulife Securities, who likes to refer to condos as “pockets of air in the sky.”
He says if you want to invest in condominiums in Toronto you really need a long investment horizon. “The volatility potential on condo real estate has the potential to be far greater than normal real estate,” says Mr. Rosentreter. “It’s a game that has worked well but the return on investment [is getting harder]. You have to put so much down and the spaces are getting smaller. It’s only going to get harder as financing gets [more expensive]. I see investment properties in major cities as dangerous because of the rising costs.”
That’s the nature of speculation, of course, and what makes condominiums an interesting financial bet. It comes down to accepting negative cash flow for a bet on price appreciation driven by investors — some of whom we know little about.