Due to increasing costs of land and household debts, Canadian lenders are now investing more in rental apartments than funding condo construction.
A survey done by commercial real estate brokerage CBRE Inc. reported that 60 percent of lenders in the coming year are planning to invest more in rental apartment business while the other 30 percent choose to finance condo construction projects. A total of 13 percent focused their concerns towards the strength of the condo sector while 7 percent planned to allocate only a small part of their annual budgets to condo construction next year.
The Globe and Mail reported that recently, charges for land values and municipal-development have increased significantly in major markets like Toronto and Vancouver. Price growth of condo units, on the other hand, has slowed down extracting developers' profits.
CBRE's head of debt and structured finance, Carmi Di Fiore stated: "With high-rise condos there is always the issue of valuations, what people are paying and the amount of debt that people are taking on for residential mortgages."
The insurance of Canada Mortgage and Housing Corporation for the construction of rental apartments has given lenders a safe bet towards rental financing. At the same time, demands for rental units became steady due to low vacancy rates.
"Some of the major markets across the country have experienced a bit of a lull in condo construction," Darryl Bellwood stated. He added that some developers are moving towards the construction of purpose built-rentals. He said developers are registering new buildings as condominiums, having the option to sell the units as condos in the future and earn rental income for the meantime. He also expects the trend to increase over time. Bellwood is the assistant vice-president of commercial financing at First National Financial LP and is the first-line lender of condo and apartment developers.
For the past year, institutional investors were also in for rentals. With low interest rates, pension funds and REITs also turned to rental construction to have higher returns.
Canada Pension Plan Investment Board's first strike into rental business was a $105-million business with the Minto Group Inc. The board paid $105-million for a 60 percent stake in a Minto Group Inc-owned apartment building in Toronto.
In 2016, there is an expected competition between foreign investors and domestic lenders. Domestic lenders think that a huge threat in their business will possibly be brought by foreign capital.
