Rental market a solid investment opportunity in Montreal

The multi-residential rental market in Quebec is a solid investment alternative to condos, especially as the condo market is showing some signs of slowdown, says Marc Hétu, senior associate at CBRE’s National Apartment Group in Montreal.
Hétu spoke at the Quebec Apartment Investment Conference on a Feb. 14 during a session that gave an overview on the investment market for small, mid and large scale transactions in the province.
The still healthy condo market is giving apartment owners some competition, as most condos are newer than apartments and growing numbers of condo owners are renting their units to tenants Hetu said.
The apartment market in Montreal is coming off a record year that saw $1.38 billion in transactions in 2012, said Alexandre Sieber, senior vice-president and senior managing director of CBRE in Montreal.
Sales in the last two years were led by investment and institutional funds, unlike the market of 2008-2010 which was strongly led by private investors, he said. 
Market suffers from a lack of product
Sieber expects sales volumes to drop in 2013 and to return to 2010 /2011 levels of about $900 million per year. That drop will occur not because of a decline in capital markets but due to a lack of product. 
Unlike 2012, “we don’t think there will be mega-transactions this year,” says Sieber.
One of those 2012 mega-transactions was the sale of La Cité, a 1,351 unit property (including 206 furnished units that are usually rented for one to three months by executives) at Parc Ave. and Prince Arthur St. near Mount Royal in downtown Montreal.
James Palladino, vice-president of RBC Capital Markets Real Estate Group was involved in the sale. He said the property sold for $232.5 million last August or $172,000 per unit. It’s now managed by Oxford Residential, with rentals ranging from $825 per month for a studio apartment to $3,800 for a furnished three-bedroom.
However, such large multi-residential properties are few and far between in Montreal, said real estate broker Patrice Ménard of Patrice Ménard Multi-Logements, which specializes in buying and selling apartment buildings.
Half of Montreal's buildings have less than 100 units
The number of smaller apartment buildings with 20 to 40 units dwarfs the number of such sized buildings in Toronto, Ménard said. In Montreal, 45% of multi-residential transactions involve buildings with less than 100 units and these sales are considered as extremely important by banks.
Ménard says an aging housing stock that is not well-maintained poses the biggest challenge to Montreal’s multi-residential housing market. Palladino added that buildings older than 30 or 40 years old are costly to repair and Montreal has lots of them.
However, Ménard said as many as 85% of small apartment buildings have had the same owners for more than five years. “It’s incredible the amount of equity they have,” he says, noting the vast majority have outstanding mortgages that are worth less than 50% of their buildings’ value. As a result, he sees few prospects of risk for these owners, even if the market sees a downturn. 
Majority of rents are below $800
In addition, the vast majority of Montreal apartments rent for below $800, meaning the ability of tenants to pay their rent will remain good if the economy falters.
Palladino says the biggest challenges in 2013 will be in finding motivated vendors and in managing the expectations of owners and sellers. The key lies in finding the sweet spot where vendors don’t think they’re leaving too much money on the table and buyers don’t think they’ve overpaid. 
Says Palladino: “Owners are saying ‘what will I do with my funds? I’m not interested in leaving my money in the bank’” and the stock market remains shaky.
Hétu expects low interest rates to continue in 2013 and sees solid employment and immigration levels in Montreal, all of which are positive factors for owners of  rental properties.
While condos remain the most profitable route for developers, he expects to see more multi-residential units built outside the downtown core. Although he’d like to see such units being built downtown, that does not appear to be in the offing.
Hétu adds that building an apartment is enough to attract investors. “If you build it, investors will come,” he says.

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