TORONTO (Reuters) - Amid fears of a bubble in condominium prices in Canada’s largest cities, developers say they are shifting from building condos to high-rise rental apartments, as institutional investors look for assets with steady cash flow.
Canadian developers have largely focused on condos for more than a decade, but builders say demand from pension funds and real estate investment trusts (REITs) for rental income to diversify their portfolios has them shifting gears.
The result is, not only more rental units on offer in cities like Vancouver and Toronto, but a slowdown in the supply of new condos.
“It’s easier to make money in rental than it used to be,” said Christopher Wein, president of Great Gulf Residential, a developer with projects in Canada and the United States.
“The fact that pension funds and institutional investors are looking for more long-term income producing assets like purpose-build residential rental towers gives us more opportunity to sell the buildings once they are completed.”
All of the 12 projects Wein has in the design stage were planned as condominiums, but he now intends to make four of them rental projects.
Developers point to solid rental demand. Recent data from Canada’s national housing agency showed the vacancy rates in Toronto and Vancouver were 1.5 percent and 0.8 percent respectively, well below the national average of 3.3 percent.
“There is an absolute rise in rental interest,” said Jonathan Wener, chief executive of developer Canderel. “There are a lot of institutional investors who prefer the recurrent revenue stream from apartments.”
Montreal-based Canderel, which built Canada’s tallest condo tower in Toronto, has proposed a combination of rentals and condo units within a multi-billion dollar proposal for the LeBreton flats mixed-used site in Ottawa.
Rai Sahi, chief executive of real estate company Morguard Corp and Morguard REIT, said the shift by developers to rentals may be less about demand for them than their fears of a condo glut.
“It may well be some of the condo guys are realizing that they can’t sell condos because the market has come to a point where there are too many condos already. So they may not have a choice,” said Sahi.
But James Midwinter, executive vice president of development at GWL Realty Advisors, said it’s the steady income that investors want.
“There has been a great increase in appetite to own multi-family residential by institutional investors,” said Midwinter. “These buildings are always full .... so it might not provide as high a return as in commercial real estate, but it’s a very stable investment.”
Great Gulf’s Wein acknowledged there is a limit to how big the rental market will ever get, in part because the high price of land.
“Purpose-built rental is not for the faint of heart, and you have to go in with your eyes wide open because you may end up owning it for 25 years ... not all condo developers can handle that - it takes a lot of equity to hold for 30 years.”
Additional reporting by Allison Lampert in Montreal