Multi-residential property sales for the greater Toronto area totalled $805 million in 2012, the second-highest annual sales total in nearly two decades, according to Petrus Commercial Realty Corp.
The Toronto-based firm, which has been tracking apartment property sales since 1995, noted that the 2012 sales result is also well above the $501 million annual average. (The best year for multi-res sales of apartments over more than 100 units was 2004, when $860 million worth of transactions was tallied.)
Petrus also broke down sales volumes by area code: volumes in 2012 were $610 million in the 416 area (up from the 2011’s total of $487 million) and $195 million in the 905 area, up from $85 million in 2011.
Behind the numbers
So what’s behind the near-record results?
“It is just driven by interest rates,” said Pierre Gagne, owner and broker of record of Petrus. “If you can get a mortgage at 2.9 per cent, it sort of drives down your cap rate, doesn’t it?”
Gagne said big-money players were behind the transactions. “Most of those numbers came from big portfolio sales,” he said. “Private people don’t really sell.”
He pointed to a $39-million portfolio sale by Skyline Apartment REIT, which has made a decision to focus on properties outside of the GTA.
“I would classify this market as dominated by strategic sellers. It is strategic selling driven by accommodative pricing. Even from the purchaser’s point of view, you can see from our analysis it is still accretive, so even after you look at the cost of financing, they are still making money at those prices.”
Different take on the numbers
The key measuring stick for Petrus is “cash on cash return” or CoCR. The firm has typically calculated that using the average cap rate for the year, assuming that all purchases are CMHC-financed at an 80 per cent loan-to-value ratio on a five-year term and 25-year amortization. (For the first time in 2011 and 2012, that model now mirrors the additional requirement for a longer term and lower leverage option of a 65 per cent loan-value ratio and 10-year term).
Petrus found that the average 2012 cash on cash return in the GTA continued on the general downtrend in 2012. However, the sharp five-year rate increase from 0.77% in 2011 to 5.52% in the 905 area may indicate a potential start of a reversal caused by the prospect of expected higher financing costs.
“We make the assumption that everybody is going to buy with the same type of financing. It is an assumption and it doesn’t hold true with every sale, but as a proxy it is a good indication of where things are going to go. And in the 905 area, this is the first time that the cash on cash return was selling.”
Petrus found that in 2008, CoCr had compressed to its lowest level in 14 years, reaching 1.04% in the 416 area and 3.6% in the 905 area. CoCr for 2012 was 3.15% for the five-year term financing and 2.32% for the 10-year term. CoCr for the 905 region last year was 5.28% for the five-year term financing and 5.52% for the 10-year term. “All returns attest to the continued accretive nature of rental apartment building investments in the GTA,” the firm concluded in its report.
The lower CoCr trend is following the lower cap rate trend as well. Average 2012 cap rates were 5.0% in the 416 region and 5.9% for the 905 area which encircles the Toronto core.
Petrus also measures income per suite “a general proxy for building quality,” a measure that jumped to $7,241 in the 416 area in 2012 up from a $5,100-$5,700 range over the previous five years. The price per suite jumped accordingly to $130,538 in 2012 up from $90,895 in 2011.
Price per suite has been historically higher in the 905 area given the municipal tax rate differential and providing higher net income per suite after expenses to the investor when compared to 416 properties. Last year showed a reversal “probably due the sold asset quality and the flight to quality” of the 416 area.
Rates are prompting both buyers and sellers, the brokerage concluded in its report. “Purchasers can afford to pay current prices when financing markets are as attractive as
they are today. Willing vendors do not sell just because prices are favourable but will pay attention to the direction of such financing conditions in their strategic decision to sell.”
What About 2013?
Because Petrus is “on the ground” so to speak, the firm also has a pretty good idea how the multi-res market has performed this year.
“It seems to me that we are still on par to accomplish the same types of results volume-wise and pricing-wise,” said Gagne.