Executives from five major companies closed the AptCon 19 rental apartment development conference by offering their insights into the risks and rewards of the sector.
“It’s a very competitive environment to buy apartments,” Centurion Asset Management Inc. president and chief executive officer Greg Romundt told the audience in the Sheraton Centre Toronto Hotel’s Provincial Theatre on May 28.
What follows are capsules outlining their key thoughts and strategic insights.
Concert Properties Ltd.
Concert Properties Ltd., which has offices in Vancouver and Toronto, has assets of more than $3 billion and more than $2 billion in shareholder equity. It’s exclusively owned by Canadian union and management pension plans and is involved in: developing rental apartments, condominiums and retirement communities; acquiring and developing commercial, industrial and infrastructure properties; and property management across Canada.
President and CEO Brian McCauley said Concert has acquired properties for master-planned communities in Vancouver, Victoria and Toronto. It has 10,000 homes in the planning pipeline, with about one-third of those being purpose-built rental units.
Concert only develops; it doesn’t acquire existing apartments. McCauley said that strategy and long-term ownership of its apartments “requires a premium on capital and a lot more patience than the other asset classes.”
McCauley doesn’t believe there’s an oversupply of apartments in any Canadian market. He noted approximately 350,000 immigrants are expected to come to Canada on an annual basis. Fifty per cent of immigrants have traditionally settled in the Greater Toronto Area and 80 per cent rent before owning a home.
There are currently housing affordability problems across the country and many first-time buyers are being taken out of the market. However, McCauley said a psychological shift is occurring in Canada, and people have developed a more positive attitude about renting.
Concert and other apartment developers are working with all levels of government and Canada Mortgage and Housing Corporation on various rental housing availability programs. The challenge, however, is dealing with the different requirements and criteria for each individual program.
With its focus on developing apartments in areas of Vancouver and Toronto with good transit access, McCauley took the opposite tack from Romundt. He’s OK with these buildings being in close proximity to condos.
“We’re very happy to go side-by-side with condos in those locations because we can demonstrate how professionally managed rental apartment buildings — where there’s a landlord there that will look after your needs, unlike renting from an individual investor in a condominium — can compete shoulder-to-shoulder.”
Concert is also considering repositioning some of its retail assets to include a rental residential component.
Centurion Asset Management Inc.
Centurion owns and manages more than $2 billion in assets, and has a focus on private investment products, corporate financing, mortgage financing, multi-residential apartments and student housing communities.
The Toronto-based company’s current growth strategy targets building new apartments because it provides higher risk-adjusted returns than buying existing ones.
Centurion prefers being in markets outside of major cities where land is cheaper, rents and housing prices aren’t as high, approvals can usually be obtained faster, and there’s little competition with condo developers.
While Centurion will remain focused on building apartment buildings in Canada, it’s becoming increasingly active in the United States, where development yields are much higher and the entitlement process is generally faster.
Romundt said it’s possible to complete a building in 12 months and be leased up six months after that south of the border, which could take up to five years in Canada.
Romundt said it’s easy to build a condo, even in challenged markets, with 10 per cent equity. Building a rental apartment, he countered, requires at least 30 per cent equity. Therefore, it’s very important to find good mezzanine financing or equity partners for projects.
Killam Apartment REIT
The Halifax-based firm is one of Canada’s largest residential landlords, owning, operating, managing and developing a $2.7-billion portfolio of apartments and manufactured home community properties.
Killam is currently building in Charlottetown and Halifax, and just finished the 227-unit first phase of the Frontier development in Ottawa, a partnership with RioCan REIT (REI-UN-T).
It’s working on permitting for a Mississauga development which Fraser hopes to start this summer, and the company has multiple sites in Ontario’s Kitchener-Waterloo region.
Fraser said Killam would like to acquire a couple more apartment sites in the next 12 to 18 months. He’s looking for more energy-efficient buildings and is a big believer in geothermal energy in Ontario.
Lepine Corporation is focused on the development of luxury residential apartments. President Francis Lepine prefers to have buildings in neighbourhoods where there’s not a lot of supply, and prefers older tenants who consistently pay their rent and provide less turnover.
Lepine talked about building a large apartment complex versus one building. He pointed out how building multiple structures puts you in competition with yourself during the next phase of construction.
Lepine also said you need efficiencies in common areas and utility systems, and need to create more amenities so there’s more bang for the buck for renters when it comes to such projects.
Lepine said his company has a substantial pipeline of projects for the future.
Vered Group is a family-run real estate development company based in Montreal that specializes in commercial, institutional and residential projects.
President Oren Vered said his company’s purpose-built rental focus is on downtown, high-end buildings catering to tenants ranging in age from their mid-20s to mid-40s.
Vered said the benefit of younger tenants, which have a 30 per cent average turnover rate, is that you can get more rent increases. Long-term tenants limit how much you can raise rents.
The company is acquiring more land for future developments. Vered said it’s interested in developing energy-efficient smart buildings and creating an enhanced sense of community through its property management platform.