Canada builders shift from condos to rentals amid investor demand

By Andrea Hopkins
TORONTO, Feb 4 (Reuters) - Amid fears of a bubble in
condominium prices in Canada's largest cities, developers say
they are shifting from building condos to high-rise rental
apartments, as institutional investors look for assets with
steady cash flow.
Canadian developers have largely focused on condos for more
than a decade, but builders say demand from pension funds and
real estate investment trusts (REITs) for rental income to
diversify their portfolios has them shifting gears.
The result is, not only more rental units on offer in cities
like Vancouver and Toronto, but a slowdown in the supply of new
condos.
"It's easier to make money in rental than it used to be,"
said Christopher Wein, president of Great Gulf Residential, a
developer with projects in Canada and the United States.
"The fact that pension funds and institutional investors are
looking for more long-term income producing assets like
purpose-build residential rental towers gives us more
opportunity to sell the buildings once they are completed."
All of the 12 projects Wein has in the design stage were
planned as condominiums, but he now intends to make four of them
rental projects.
Developers point to solid rental demand. Recent data from
Canada's national housing agency showed the vacancy rates in
Toronto and Vancouver were 1.5 percent and 0.8 percent
respectively, well below the national average of 3.3 percent.
"There is an absolute rise in rental interest," said
Jonathan Wener, chief executive of developer Canderel. "There
are a lot of institutional investors who prefer the recurrent
revenue stream from apartments."
Montreal-based Canderel, which built Canada's tallest condo
tower in Toronto, has proposed a combination of rentals and
condo units within a multi-billion dollar proposal for the
LeBreton flats mixed-used site in Ottawa.
Rai Sahi, chief executive of real estate company Morguard
Corp and Morguard REIT, said the shift by developers to rentals
may be less about demand for them than their fears of a condo
glut.
"It may well be some of the condo guys are realizing that
they can't sell condos because the market has come to a point
where there are too many condos already. So they may not have a
choice," said Sahi.
But James Midwinter, executive vice president of development
at GWL Realty Advisors, said it's the steady income that
investors want.
"There has been a great increase in appetite to own
multi-family residential by institutional investors," said
Midwinter. "These buildings are always full .... so it might not
provide as high a return as in commercial real estate, but it's
a very stable investment."
Great Gulf's Wein acknowledged there is a limit to how big
the rental market will ever get, in part because the high price
of land.
"Purpose-built rental is not for the faint of heart, and you
have to go in with your eyes wide open because you may end up
owning it for 25 years ... not all condo developers can handle
that - it takes a lot of equity to hold for 30 years."