Investors flock to Vancouver real estate market

The Vancouver Real Estate Forum, to be held this year on April 12, includes a panel discussion on the growing trend of institutional investors partnering with local developers.DARRYL DYCK/The Canadian Press

Which came first, investor demand or lack of supply? To many, the issue of Vancouver’s affordability crisis sounds a lot like the old chicken-or-egg puzzle. There are those who fiercely believe that local governments and landlords have hampered the progress of new construction over the years, limiting supply and driving up prices. And then there are those who believe that much of the new housing coming online targets investors looking to maximize their profits, turning housing into an actual monopoly game.

In recent years, large investors, also known as institutional investors, have moved into the Lower Mainland to take direct advantage of one of the most lucrative real estate markets in the world. The Vancouver Real Estate Forum, to be held this year on April 12 at the Vancouver Convention Centre, includes a panel discussion on the growing trend of institutional investors partnering with local developers. And experts from investment firms will speak in other panels that will cover everything from government policies and rental housing demand to the affordability crisis.

“They align themselves with local developer talent who are good at finding opportunities and properties – pension funds are happy to participate directly with guys like us,” said Brent Sawchyn, director and general manager of the company. of development PC Urban Properties, and a Forum panelist. Mr. Sawchyn’s medium-sized company has partnered with several of these companies on projects over the past few years.

He estimates that, globally, there are about a dozen markets for pension fund types to pump their money into and Vancouver is a draw. They look for markets where population and business opportunities are on the rise. For developers, these partnerships with investors have become more attractive due to the high cost of development.

“If you have $10 billion of money that you want to invest in real estate in certain markets in Canada – let’s say multi-family apartment buildings – you have to cast your net wide enough to be able to fill that need, to place that money,” Mr. Sawchyn said.

“Pension funds and ‘quasi-pension funds’ are all interested in participating in real estate so that they can ultimately earn a continuing return on their investment – so that they can buy real estate of existing apartments or that they can participate with us, where we can build a brand new, brand new apartment building, with far fewer repairs and maintenance requirements, and then generate an attractive return for them. »

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Some housing advocates have accused the institutional investor of pushing prices higher because it is grabbing stock of older apartments and chasing healthy returns. Mr Sawchyn and others argue they serve the opposite purpose, as it would otherwise be too risky to build rental apartments. For large investors, however, apartment buildings “are highly sought after and prized,” he says.

“Without institutional investment in, say, new apartment buildings, we weren’t delivering any stock.

“Some say, ‘It’s a new building, the rents are high, it’s not affordable.’ “But if we have 75,000 to 100,000 people moving here every year in the Lower Mainland, we have to build housing. And without pension funds participating in housing, we won’t have any inventory left. Rents will continue to rise.” »

Housing advocates have accused the institutional investor of pushing prices higher because it is grabbing stock of older apartments and chasing healthy returns.DARRYL DYCK/The Canadian Press

But it’s also true that the big investor is in the Vancouver market expressly because growth is expected. Some argue that anything that gets in the way, like government regulations that limit rents, or building heights, or expensive development fees, or public engagement that blocks projects for years, for example, hampers delivery. of supply. For some, less regulation of the housing system is the most effective way to meet future demand.

Andrey Pavlov, professor of finance at Simon Fraser University, argues that institutional investors are generally better landlords than family owners, and that regulations and taxes designed to cool the market only increase their financial burden, making less affordable housing. We must not build only for the current population, we must build to house future populations, says Mr. Pavlov.

“We’ve limited population growth in the Lower Mainland because of limits on housing,” he says. “There’s this added complication that maybe you have an investment demand that really has nothing to do with the current population growth. In my opinion, we should provide enough housing even for that, and that can be But there’s a harder point to make, but in the rental market it’s very, very clear.

The rental vacancy rate, he says, should reach at least 3% to adequately supply the population.

Patrick Condon, professor of urban design at the University of British Columbia and author of Sick City: Disease, Race, Inequality, and Urban Lands, argues that the housing crisis stems from the commodification of land, which is no longer based on its value for housing, but on its value as a global asset class. Solving the housing problem, he says, requires controlling the price of urban land.

“Housing is no longer valued for its usefulness. It is now valued as a commodity, just like gold, Bitcoin or stocks and bonds,” he said in an email. “We have moved from a largely wage-based economy to a largely investment-based economy, with investors now in the driver’s seat. It’s extra complicated, because most of us participate in it and benefit from it, with our RRSPs and our contributions to the pension fund, not to mention the baby boomers who enjoy a passive gain of $4 million. for their home in Dunbar.

Developer David Fullbrook says he’s not sure a glut of new supplies will drive prices down.

“I look at the paradigm and it has too many opposing forces.”

There are many constraints on available land, and the cost of land is high. He says that means only a few major players with deep pockets can afford to play.

“Overall, it’s more the commodification of housing that’s fundamentally a problem, which we just haven’t identified as a reality. We didn’t allow that to happen for health care and we allowed it to happen for housing – and now that the dice have been cast it’s going to be very difficult to unravel that I guess” , did he declare.

Mr. Fullbrook, who has been in the industry for 30 years and has spent most of his career in the United States, partners with investors and builds primarily commercial developments in British Columbia and Alberta, including multi-family residences.

“When the dot com collapsed in 2000, that freed up a lot of capital and that money started flowing into commercial real estate. I speak globally. … When that money started flowing, it never stopped and it started accelerating. So what you have now…is really institutional capital that is primarily fueling residential development.

“I think the big meltdown was obviously the Liberal government’s lack of attention to housing and the value that was created for them politically by this influx of Chinese capital, this foreign investment money that really protected Vancouver from some cyclical fluctuations that occurred throughout North America.

“I always view Vancouver investors as being rewarded for speculation. They buy property and they can overpay. They don’t really know what a downturn looks like. So there has always been money to be made, and the province is constantly trying to manipulate the system to lead or induce capital to behave in a certain way – and we are simply too late.

“Since the Expo, there have been 30 years of unprecedented demand for real estate in British Columbia and it does not seem to be affected by the typical market fluctuations that would make people a little more cautious, especially adventurers speculations that don’t really add much. of value to the process, in my opinion.

Mr Fullbrook finds rising rents worrying and worries about the future of his own children. He said he had just priced a 128-unit, 20-story concrete tower at a buildable $650 per foot, not including land, profit and interest to cover financing. This means that the consumer is expecting around $500,000 for a 500 square foot condo. That’s about 10 times the average salary, compared to when it started, and a house can be three times the average salary. This creates a “vicious cycle of haves and have-nots,” says Fullbrook.

And investors are, by necessity, driven by profit.

“We had a deal that we were very interested in, and there was a group of investors that were interested in the project and were putting capital into it, and what they wanted us to do was something that I just wouldn’t do. not. I wouldn’t undermine a community that was thriving, and well positioned to make a faster return.

“That was really what drove them: ‘we want to make that money in three years and take it out and then get it back’.

“I don’t judge him,” he adds. “I just recognize that it’s a market factor, that there’s a miserly quality to investors.”

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Penny D. Jackson