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Where have all the GTA Condo Investors Gone?

The media continues to delight in any potentially negative reports that come out regarding the residential new housing market. No matter what the news is, it is always bad. When over 28,000 new condominium units were sold in 2011 to break an all time record, it was a bubble waiting to be burst. Now that the first three quarters of 2012 sales are in, the media delights in the recent drop in numbers of new condominium sales, September being the fourth lowest September high-rise sales on record. No matter what the industry does, it is always on the precipice of disaster. In Canada, we like to eat our young.

Most recently, Susan Pigg in Wednesday’s Business Section of The Toronto Star wrote on the dramatic disappearance of investor interest in new projects. Interviews with developers and industry consultants suggested that there has been an over 50% downturn in investors purchasing units.

Buried in the article are comments of Ben Myers which reflect the true reality of the marketplace. Ben, Executive Vice-President of the market research firm Urbanation, noted that the market is merely returning to a normal marketplace like we had for years prior to 2005. In that era, a project of 300-500 units would be launched and take a year or longer to reach the necessary 65-75% pre-sale level to permit construction financing to be obtained. These were markets where investors were buying units based on value and location and a real return.

For the moment, save and except for certain trophy projects, most projects will no longer hit their 70% pre-sale levels in 3-4 months. For the marketplace, that is a good thing. It forces developers to focus on designing condominium projects and units for end users, places where owners want to live and not merely rent temporarily.

If the investors have gone, why have they left? Earlier this week, a well known industry cost consultant now working in the development industry suggested two reasons. Firstly, recent changes in CMHC insurance rules and extreme tightening of banking lending criteria, has made it significantly more difficult for investors to be pre-qualified for mortgage commitments, a necessary requirement to be an “approved purchaser” for pre-sale requirements for construction lenders. These investors are usually self-employed and do not necessarily meet stringent income tests being applied by residential mortgage lenders. Secondly, with prices for mid-level condominiums in the GTA reaching and exceeding $700 per square foot, the gap between capital returns and carrying costs continues to grow, making condominium purchase uneconomic, save for potential capital gains. Investors are starting to sit on the sidelines awaiting a price correction. Benjamin Tal, Chief Economist for CIBC Wood Gundy, predicted last week at a BILD breakfast that a correction will be coming over the next year in the range of 10-15%.

Most developers have sat on the sidelines in the spring and the fall 2012, resulting in many fewer launches and, accordingly, fewer sales. A number of major launches have been scheduled including the Westinghouse site (King Blu) at King and Peter Streets, refurbishment of the Sutton Place Hotel, Tridel’s 65-storeys, 695 unit, 10 York Project on the Toronto Waterfront, Empire Communities 2-tower, 1,250 unit, Eau Du Soleil development on the Etobicoke Waterfront, and the joint venture project between Bazis, RioCan and Metropia at Yonge and Eglinton, the E Condos – 2 tower project at Yonge and Eglinton. These major launches of a substantial number of units will be a litmus test for the appetite of the remaining investors in the Toronto condominium market as well as local buyers.

The reality is there is still a tremendous demand for high-rise housing in Toronto. Location, pricing, uniqueness and most of all, patience, will be the watchword for success in the coming months and 2013.

Stay tuned.

Brandon Lee Cell 416-471-0353, HL/Bayview


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