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Weekly Buzz: Bank of Canada interest rate hike and U.S. investment

Western Investor's media content roundup for the week of July 10 to July 14, 2017, featuring top stories on Western Canada’s commercial real estate market
The Bank of Canada overnight lending rate has increased for the first time in seven years.


The major news of the week for home owners and investors alike is the Bank of Canada’s announcement on Wednesday, July 12 that it would be raising its key interest rate 0.25 per cent, bringing the new overnight lending rate to 0.75 per cent. What does this mean for home sales in the province? Our Weekly Buzz breaks it down.

In addition, Western Investor looks at major developments revving up on the New West waterfront, while editor Frank O’Brien runs down the pros of limited partnerships in residential investment and how local investors are snapping up lucrative commercial properties south of the border.

Here is our pick of the top commercial real estate stories published during the week.



Home prices in Canada will keep rising, despite interest rate hike: Royal LePage – Global News

This week, the Bank of Canada increased its key interest rate for the first time in seven years, followed by increases in rates by TD Canada Trust, Bank of Montreal Scotiabank and CIBC. The Bank of Canada overnight rate rose from 0.50 per cent to 0.75 rate, while the banks’ interest rates will rise to 2.95 per cent from 2.7. Global News took a look at Royal LePage’s analysis of how the interest rate hikes will affect home sales.

Wednesday’s interest rate hike by the Bank of Canada – the first increase in nearly seven years – has Royal LePage unfazed.

“Canadian homeowners are prepared for the marginal increase in mortgage rates,” Phil Soper, the company’s president and CEO, said in a housing survey released Thursday.

The fact that the central bank raised rates is a signal that economic growth is robust, the report goes on to note. “We believe that the market is better served by a healthy economy that requires a return to normal conditions.”

Nor does Soper see the prospect of another rate increase, which could come as early as September, triggering a rush by prospective homebuyers to make a purchase and lock in a fixed interest rate on their mortgage.

Such a rush never materialized in the immediate aftermath of the financial crisis, when many thought rates would climb back up just as quickly as they had come down at the onset of the Great Recession.

If Canadians didn’t panic then, Soper reckons, they won’t think much for the current cycle of rate hikes, which is widely expected to be slow and gradual.

Still, Soper’s views are based on the expectation that interest rates won’t rise beyond 1 per cent over the next year and a half (up from 0.75 per cent today and 0.5 per cent until Tuesday).

That assumption differs from what some of the big banks are forecasting, with Royal Bank and Bank of Nova Scotia, for example, indicating that a hike to 1.5 per cent by the end of 2018 is possible.

The company forecasts the national aggregate price of a home to $617,773 by the end of 2017, a 9.5 per cent increase for the year compared to 2016.

Here’s the city-level breakdown:

Greater Vancouver home sales fell off a cliff in late 2016, after the B.C. government introduced a tax on foreign homebuyers. But the market seemed to turn a corner in the second quarter (April to June) of 2017. Overall, Royal LePage expects to see a low single-digit price increase in 2017.

[Global News]


Local investors cash in on U.S. multi-family market – Business in Vancouver 

Despite the low dollar, Canadians are taking advantage of moderately-priced multi-family stock south of the border. A North Shore CEO is now the third-largest landlord in Phoenix, AZ, WI editor Frank O’Brien reports.

Janet LePage, general partner and CEO of North Vancouver's Western Wealth Capital, as one example, is now the third-largest landlord in Phoenix. In the past six years her company has bought 31 multi-family properties in the Arizona capital, representing 5,125 rental units worth more than US$375 million.

“We are generating annualized returns of more than 20%,” the 36-year-old mother of two told Business in Vancouver.

LePage is not alone in finding U.S. real estate opportunities.

A Jones Lang LaSalle (JLL) report on global capital flows underscores the leading role investors from Canada have played in recent U.S. deals.

The first quarter of last year alone saw a fivefold increase in aggregate deal values from the same quarter a year earlier, with US$3.6 billion worth of trades to Canadians.

Highlights include Ivanhoé Cambridge’s US$2.2 billion purchase of 1095 Sixth Avenue in Manhattan and, a few blocks away, Bentall Kennedy’s US$360 million purchase of 757 Third Avenue, as well as the Canada Pension Plan Investment Board’s acquisition of 1455 Market Street in San Francisco and a host of lesser deals by Vancouver investors Pure Multi-Family Real Estate Investment Trust (TSX-V:RUF.U) and Nicola Crosby Real Estate.

In June, Pure Multi-Family, which concentrates on U.S. rental buildings, bought a 264-unit multi-family complex in Phoenix for US$47.5 million. In all, Pure Multi-Family now owns 19 multi-family properties in the U.S. with 6,209 rental units.

The U.S. multi-family attraction may be fading, according to JLL, but it sees “strong growth” continuing in Sun Belt markets, including Phoenix.

[Business in Vancouver]


Development boom towers over New Westminster riverfront – Western Investor

Building permit values in New West are soaring and major local developers like Bosa Properties are spending millions to develop the New West riverfront. Major Jonathan Cote says Bosa’s tower project has been the missing link in unlocking the city’s development potential.

The City of New Westminster is averaging more than 50 new building permits every month this year, on a pace to edge out the $189 million in permits issued in 2016, the 10th straight year the Royal City has topped $100 million in permit values.

As of the end of May, permit values had already eclipsed $144.5 million, and housing starts, at 612 units, were far ahead of the 339 starts in the same period last year.

“If the pace holds, [2017] will work out to a 12.7% increase from the previous year,” said Blair Fryer, communications and development manager for the city of 71,000 on the banks of the Fraser River.

There is little doubt the pace will hold up.

This month, New Westminster council approved zoning for the largest tower the city has ever seen: Bosa Development’s 53-storey condominium skyscraper.

The building is part of a project that will include a second 43-storey tower and a three-storey commercial building, all built on the New Westminster riverfront.

The anchor tower of Bosa’s Pier West would be the tallest building between Vancouver and Calgary if built today.

“We saw overwhelming support for a two-tower scheme that opened up the skylines, with a modest increase in height,” said Dan Diebolt, development manager at Bosa Development.

Bosa bought the 660 Quayside site from Larco Developments last August for $63 million, which works out to $79 per buildable square foot, according to Colliers International. (Today, this could be seen as a bargain price, considering a non-waterfront site on Duncan Street in New Westminster sold this spring at $89 per buildable square foot.)

Larco’s original development plan called for 1,000 housing units in five towers. Bosa’s bid scaled that back to three buildings and 665 homes, mostly tower condominiums with a total density of 4.52 floor space ratio. Bosa had to earn the variance that allowed the zoning to go an extra eight floors of prime waterfront condo space that is expected to pre-sell for north of $750 per square foot.

[Western Investor]


Residential investing: Time to look at limited partnerships – Western Investor

Limited partnerships are offering compelling returns to investors with minimal risk, unlocking potential in submarkets like Squamish, Victoria and Kelowna.

The average price for a detached house in Metro Vancouver is now $1.54 million and the average condo apartment is selling for $524,600, according to Landcor Data Corp. You need a large down payment – starting at $100,000 – to make even condo rental payments work at covering your costs, which must include a property manager.

But there is a quieter, proven route to riches in residential real estate that involves investors pooling nominal funds and then sharing in the cash flow and appreciation on a managed property that they may never even have to step into.

These are often structured as limited partnerships (LPs) and, in the past few years, have generated substantial returns of up to 20 per cent or more.

The concept of a residential LP is that investors put money into a development where a management team has already done the leg work in acquiring the zoning, development permits, construction contracts and exit strategies. Depending on how it is structured, investors can receive a share of rental income and a share of the profits at exit (usually in less than five years.) In many cases, investors also have the option to purchase one of the housing units at a discount.

Here’s a deal from Performing Equity Development (Squamish) Ltd.:

The land has already been purchased and a contractor hired to build a 48-unit condominium project with 36 one- and two-bedroom units, 12 penthouse units and two to three ground-floor retail units.

The offering to investors is to put down a minimum of $25,000 in limited-partnership units. The promoters are aiming to raise $4 million with the offering and say they have already raised in excess of $3 million. “We have people putting up $300,000,” we were told.

The play is for a 22-month investment and projected returns are 50 per cent. Which means that, on pro forma, if you put up $50,000, you get back your investment plus $25,000 within the 22-month window.

The benchmark price of a Squamish condo in May was $402,000, which was up 21.7 per cent from a year ago.

[Western Investor]