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Investors go apartment hunting

Globe and Mail - July 5, 1996
by Leonard Zehr - Real Estate Reporter

Two privately owned property developers from Toronto have forked out $100-million to pick up one of the country's biggest protfolios of apartmens, another sign that easy money and the prospect of relaxed rent control rules are driving investor appetite for apartment buildings.

RHK Capital Inc. and the Wolbrom family each acquired about half of a package of 1,676 apartment and townhouse suites in nine buildings in Brampton, northwest of Toronto, that were formerly owned by defunct Bramalea Inc.

CB Commerical Real Estate Group Canada Inc. had the properties listed at a price of $101-million. "The fact that the apartments sold so close to the asking price is a good indication of how strong the market is, "says David Montressor, a CB Commerical associate vice-president who was involved in the Bramalea sale.

As one of the market leaders in apartment investment, CB Commercial's Toronto office has sold more than $387-million of buildings in the past two years, and has more than $145-million of apartment properties on the market now.

In Vancouver, CB Commercial has raked in apartment sales of $500-million since 1990, and has offers outstanding on more than $70-million of buildings.

"The market is being propelled by availability of product, low interest rates and vacancies, and the availability of financing," Mr. Montressor says.

According to the Russell Canadian Property Index, a highly respected gauge of investment activity, Ontario's apartment sector has delivered a 10 per cent annual return on investment over the past 10 years, outpacing all other sectors, including retail at 9 per cent; industrial, 8.4 per cent; ofice, 5.2 per cent; and mixed-use prjects, such as Toronto's Eaton Centre, 3.4 per cent.

Carl Epstein, a son-in-law of Sidney Wolbrom, says the family was attracted to the porfolio because Bramalea "kept its buildings impeccable, had high-calibre staff and had a genuine concern for its tenants."

The Wolbroms have been in the apartment business for 25 years and own more thatn 3,300 suite around Toronto, including 873 Bramalea units acquired at a cost of $52.4-million.

"It was a big leap for us," says Ronald Kely, president of RHK Capital, which purchased 803 Bramalea apartments and townhouses for $47.7-million, boosting its apartment portfolio to about 900 suites.

Vacancy rates in the Toronto area run between 1 and 2 per cent and should remain in this range for the forseeable future, industry observers predict. If Ontario revamps its rent control legislation, some rents would rise, making apartments an even more attractive investment.

Bill Zigomanis, manager of mortgage placement services at Toronto-Dominion Bank, which financed the Wolbrom and RHK Capital purchases, says apartments represent the most stable investment sector in the real estate indsutry because "people need a place to live even if they'r out of work and on welfare."

Last week, the Ontario government released a discussion paper to reform its rent control system that would:

Continue to cap rent increases at 2.8 per cent annually for tenants in their current digs.

Allow landlords to raise rents without restriction when a tenant moves out, and impose a new cap on rent increases on the new tenant.

Cap rent increases based on capital expenditures by landlords at 4 per cent beyond the rent control guideline.

And exempt new construction from rent control guidelines.

"Rent controls have had a negative impact on investors in Ontario because the incentives to pass along costs for maintaining buildings have been taken away," Mr. Zigomanis says.

Relaxing rent controls itself will not be enough to start construction." Apartment sales in the Toronto area currently average about 450,000 a suite, well below an average of $63,000 a suite in 1989, before property prices collapsed. New construction wuold likely cost more than $80,000 a suite, Mr. Zigomanis estimates.

The Bramalea suites sold for an average of nearly $60,000 each, a premium price reserved for modern buildings constructed within the past 20 years.

Building new apartments remains an elusive target across the rest of the country. Richard Weir, a CB Commercial vice-president in Vancouver, says new rental construction is not feasible because land prices have climbed in concert with condominium prices. Moreover, about 5 per cent of existing apartments disappear each year through conversion and demolition.

Vancouver is unique among Canadian cities because half of the rental stock is made up of "non-traditional" rental housing, such as investor-owned condominiums. "As a result, new condominium construction is necessary to balance the rental market," Mr. Weir says.

Vacancy rates in Vancouver are between 1 and 2 per cent and rental rates are likely to increase 2 to 3 per cent this year.

Mr. Weir estimates that offshore investors account for about 40 per cent of investment activity in the Vancouver apartment market. Rental properties trade at a significant premium to most other cities and other property classes, with yields averaging 7 to 7.5 per cent, he adds.

In Calgary, the vacancy rate is about 3.5 per cent and likely to fall to 2.5 per cent by the end of the year, lifting rents by 2 to 10 per cent, predicts James Miller, an apartment specialist with CB Commercial in Calgary.

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