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Canada’s slow condominium market has created increased demand for “inventory financing” from developers looking to unlock trapped equity and speculative investors who acquired multiple units and are waiting for sale or rental prospects to improve.
CFO Capital's Bin Han, the firm's managing director for Quebec, recently oversaw one such deal for a multi-unit purchaser in S.E.C. Kevlar’s newly built Gatsby Condominiums at 1200 Drummond St. in downtown Montreal.
He told RENX inventory financing can work for both developers and condominium portfolio investors.
“Inventory financing was initially developed for condo developers,” Han said, citing a hypothetical example of a 100-unit development that pre-sold 70 housing units to be able to move forward with construction, while still holding 30 for sales closer to completion.
“Hopefully, when the construction is finished, the market will be going upward and they'll be able to sell them at a higher price for a better profit.”
If the market price drops for those 30 units, however, the developer is at risk of having to sell them for a loss. Obtaining inventory financing will allow the developer to hold them over until conditions improve.
Individual condo investors who buy five or more units are also eligible for inventory financing, as opposed to taking out individual mortgages, to enable them to hold the portfolio until they can be leased or sold for a desirable price.
Scale of the loans, and a recent example
Han said the minimum loan amount for major market investors would likely be $400,000 per condo unit — so $2 million for five units and going up from there.
“We’ve also seen inventory loans for large condo projects where the total unit amount is around 500, so the loan size could go up to as high as $100 million,” Han said, adding that several lenders will often work together on such large loans to developers in order to mitigate risk.
Citing the recent Montreal example he was involved with, Han said it involved a Hong Kong investor who purchased more than eight pre-construction units three years ago at the 17-storey, 151-unit The Gatsby. The man took out a 12-month inventory loan because he has confidence in the Montreal condo market recovering relatively quickly.
“He’ll be able to lease the units out for a short-term period of one year and start generating revenue that will pay off the interest payment on the inventory loan,” Han explained. “He's a very experienced investor who also did a couple of other inventory condo purchases in other major cities.”
Secondary lenders are the most active
The largest Canadian banks don’t offer inventory loans, according to Han, because they’re already involved in construction financing and don’t want to take on more concentrated risk.
“Inventory loans are mostly done by secondary lenders or secondary institutions,” Han said. “There are actually quite a lot of them in the market that are willing to take on that risk.
“The difference will be seen on the pricing. They charge a slightly higher price than for a traditional conventional loan.”
CFO is reaching out to developers to let them know it can provide inventory financing if needed and Han said there’s competition among lenders to provide the loans.
Han said the price range for these variable rate loans is generally prime plus two to 3.5 per cent and most now range from mid-nine to mid-10 per cent.
“The value has to be tested based on the most recent trades in the market in order to determine the lender's value,” Han said. “The loan-to-value ratio is always limited to between 50 and 65 per cent.”
Inventory loans for retail condos
CFO president Mark Kay provided a third example of how inventory financing can work in an e-mail exchange with RENX.
“We come up with debt strategies ahead of the curve of the market once we see where the stress is,” Kay wrote. “A great example of pioneering inventory loans was during the heart of COVID.
“We have assisted several developers that were completing their multi-residential condo towers but had retail condo components that the city required. Retail was non-existent and so were the purchasers during COVID.
“We worked with a few debt funds that supported this sector, knowing it will come back, and created inventory loans for retail. Fast forward to today. All the units sold at a healthy market price versus a deep discount if there was a forced sale during COVID.”
Han said retail condo inventory loans generally carry a higher risk than those for residential condos.
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