HOUSING OUTLOOK Whiplashed for two years, residential
investors will find balance in 2011

BY FRANK O'BRIEN

When the Onni Group unveiled its Ora condominium tower in Richmond September 29 for local realtors, the entire 68 homes sold out in less than a week at more than $510 per square foot.

It was a hopeful harbinger for a Metro Vancouver housing market that is moving cautiously into the second year since a global recession slapped sales down 40 per cent and put a stop to double-digit price increases.

As 2010 ended, multiple listing sales through the Real Estate Board of Greater Vancouver were still down 36 per cent from 2009 and average prices had not moved in nearly six months. Condominium sales, which now dominate the market, were off by 38 per cent and the average price was nearly unchanged from a year earlier.

Still, there is now a palatable buzz of optimism in the air, as developers and analysts figure that 2011 will begin the turnaround in B.C.'s housing market, despite the harmonized sales tax, stricter regulations on mortgage lending and buyers still spooked by a sluggish economy.

"There are about 10,000 new condominiums in at least a dozen new projects that have launched pre-sale marketing since September," said Jeff Hancock, a partner in MPC Intelligence, which tracks every new home project in the Lower Mainland.

Hancock said the success of different projects, on one hand the high-end Ora and the Quintet project by Malaysian-based property developer Sunrise Bhd., also in Richmond - which sold 300 homes in less than a month - and, on the other, affordable projects, such as Bruno Wall's quick-selling 2300 Kingsway and Eldorado - where all apartments are priced under $300,000 - shows the sharp division in the market.

"[Metro Vancouver] is really a tale of two markets," Hancock said. "An Asian market led by investors from mainland China and a domestic market that is very sensitive to prices and interest rates."

It is those developers caught with finished product that don't fit either market that are in trouble, said Andrew McMillan, MPC's senior data analyst.

Asian buyers are active in Richmond, parts of Coquitlam and on the west side of Vancouver, where Canada Mortgage and Housing Corp.(CMHC) estimates that more than 60 per cent of the $1.5 million-plus homes are sold to Chinese buyers. Other areas, such as South Surrey and Burnaby, have seen projects stuck with unsold units, McMillan said.

There is an estimated 206 newly completed and unsold strata homes in South Surrey, for example, he said, but only 81 new condos have sold there since the start of this year.

"Some realtors are putting the wrong perception out there," noted Salome Sallehy, hired to organize a sale at Watermark's 2970 King George Boulevard project. "Inventory is just not moving because the market isn't willing to bear those prices. Developers aren't really acknowledging that."

Watermark tried to blow out 37 one- and two-bedroom condos that had sat empty since construction finished a year ago - almost half of the development. The prices were discounted about 35 per cent from what the units sold for during pre-sales in 2006, Sallehy said. His one-day marketing blitz, however, resulted in just 10 sales.

Best deals in 2011

The best deals, especially early in 2011, will be similar new and unsold condos in completed projects, McMillan said. Such developers, he said, would rather offer incentives than reduce prices, but most are ready to deal.

CMHC estimates there is a 15-month supply of new and unsold condos across Metro Vancouver.

Investor-owned condos will likely also be offered at discounted prices next year, said Frank Schliewinsky of market analyst Strategics. Schliewinsky said that, as of November, there were 2,100 "speculative" condos on the market, with most in downtown Vancouver and in the Tri-Cities area of Coquitlam, Port Coquitlam and Port Moody. "The situation has changed and not for the better if you are one of those trying to get rid of that 'sure bet,'" Schliewinsky said.

The condo discounts should be making headlines by February, when über real estate salesman Bob Rennie plans to unveil his new strategy for selling the controversial Olympic Village project in Vancouver's False Creek.

"Sitting on my desk is a marketing plan with price reductions and incentives that the market will accept," Rennie told the CMHC Housing Outlook Conference in November. The marketing pitch will focus on "now you will love the prices," he said. "That is the closest we will get to blow out."

The City of Vancouver still must sign off on the discounted prices to sell the remaining 457 completed condos, some of which are currently priced in the $1 million-plus range. The developer, Millennium Properties, was forced into receivership last month

Some cautious

Besides the new-condo drama, the Lower Mainland housing market will be mostly balanced in 2011, CMHC market analyst Robyn Adamache told the conference.

She noted that the Vancouver area will welcome about 40,000 immigrants next year, which will create demand for 20,000 new households. Meanwhile, total new-housing starts are expected to reach 14,000 units, up 16.7 per cent from 2010.

"Balanced market conditions that have been established in recent months will continue over the next nine to 12 months," said Adamache. Fewer new listings coming on the market, due to modest price growth, and a steady pace of sales will continue to gradually draw down the inventory of resale homes for sale, she added.

Sales through MLS in Metro Vancouver will fall to 33,000, down nearly 3 per cent from this year, while the average resale home price will increase 3 per cent to $670,000. The Fraser Valley will see flat sales and average prices falling about 1 per cent to $435,000, she said.

Victoria will also see a modest sales decline, with prices down marginally to $508,000 compared with $510,000 this year, according to CMHC.

Not all the housing insiders are sold on these official forecasts, however.

Howard Steiss, former marketing and sales manager with Adera Group and now president of Red Dot Real Estate Marketing, says most analysts are being too cautious. "I think 2011 is going to be a lot stronger than most expect," he said. "The [new-home] market is undersupplied in some key areas."

Helmut Pastrick, chief economist at BC Central Credit Union, is much less bullish than even CMHC. Pastrick foresees 2011 as seeing further slowing for B.C.'s housing market, with no real recovery until 2013.

"Median prices are forecast to slide lower into the second quarter of 2011 and remain flat before rising near year's end," he said. The only increase in new-housing starts next year, he said, would be in multifamily units, which will rise 15 per cent to 15,000, provincewide.

Ozzie Jurock, publisher of the Real Estate Insider, said the 2011 market outlook is very tough to call because of global conditions. Buyers are sensitive to interest rates and confidence, he noted, and should another European country default - such as Ireland - both mortgage costs and confidence could be affected. As well, if China put pressure on residents investing offshore, it would cool some Metro markets.

"Now is the time to make offers," Jurock said, forecasting that the B.C. residential news will get worse over the next six to eight months, and the downturn could last even longer. "There is no good or bad markets, all that matters is the deal you make yourself."

Yet the potential of finding good deals in 2011 across B.C. - with historically low mortgage rates and motivated vendors - could be the best in years, Jurock said.

Rental market

For rental investors, 2011 does look promising. Metro Vancouver has among the lowest vacancies rate and the highest rental rates in the country.

Those buying new condos for a rental play need deep pockets, however, because it now requires a 45 per cent down payment to generate positive cash flow, according to Adamache,

The rental apartment vacancy rate will stay near 2 per cent next year, she said, and rental rates - which average $1,150 per month for a two-bedroom apartment and about $1,400 for condo rentals - will continue to increase. Investors now own 28 per cent of Metro condos, down from 40 per cent during the boom, CMHC estimates.

The real rental investment action will be seen next year in the Metro apartment building market, which is now attracting real estate investment trusts, pension funds and other syndicates. In the first 10 months of this year, despite onerous new mortgage restrictions and taxes and extremely low capitalization rates, sales of apartment buildings increased 14 per cent from 2009 with most of the action in pricey Vancouver, where sales soared 28 per cent.

In the West End, which led sales this year, the average apartment building sold for $234,900, up 24 per cent from a year earlier.

Canadian Apartment Properties REIT (CAP REIT) moved into the province in a big way this year. CAP REIT spent $37.5 million to acquire 1450 West Georgia Street in Vancouver this past spring, and in July the REIT bought eight buildings in Victoria for a total of $46.7 million. In addition, it opened a management office in Vancouver to oversee its B.C. operations.

"We like those markets, we think there's good upside potential," said Thomas Schwartz, president and CEO of Toronto-based CAP REIT, citing the stability of the region's real estate, constraints on new development and a growing population as factors in its optimism.

"There's no new supply. So you have growing demand in a market with finite supply," he said.

Bill Chidley, senior vice-president, corporate development, with Boardwalk REIT, a Calgary-based investor, said his company's tight focus on Metro Vancouver and Victoria is matched by the tenaciousness of owners who aren't willing to let properties go.

The company has a total of 954 units, with 257 in Victoria and 657 in the Lower Mainland. "We really don't look anywhere else," Chidley said, adding that while Boardwalk wants to expand in B.C., its encounters don't pencil out.

"We'd like to increase our position [in 2011]. What we're finding, though, is a very, very competitive market to acquire apartments. They sell at quite low cap rates, so it's challenging," Chidley said.

from Western Investor, December 2010