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Apartment Ownership Proven to be Good, Long-term Investment in Ontario; Prices Expected to Rise

Press Release, June 7, 1994

Toronto -- Apartment ownership has been a good long-term investment strategy in Ontario because of, not in spite of, rent controls, according to a 20-year study of the market.

In the summary of results published in the current edition of The Canadian Appraiser, London appraiser George Canning, AACI, shows that apartment buildings have weathered the investment cycle every well through two recessions, variations in rental accommodation vacancy rates and rent control legislation.

Mr. Canning conducted an analysis of apartment buildings with 40 units or more that sold in the London, Ontario area, between 1971 and 1992. Rent controls and the attitude of investors toward real estate as an investment were key factors, the appraiser explained.

"Before rent controls in Ontario," Canning explains, "landlords had to go literally hat in hand to their tenants. Once rent controls were in place, they were guaranteed a minimum — not maximum — rent increase every year, that was sanctioned by the government. The owners of high-rise properties who were serious about their real estate looked after their investment by providing good maintenance, and were rewarded by capital appreciate and, more important, cash flow. As a result, well-maintained, quality buildings in a good location are [unreadable word] much in demand today.

Recent changes to Ontario rent control legislation in which rent increases for repairs and maintenance have been capped have had a negative effect on sale prices for apartment buildings in London, Mr. Canning says, but prices should soon begin to move up again. "There are people out there who would buy tomorrow if the right building came on the market."
This document was downloaded from Ontario Tenants rights.
Appraisers in other major Ontario cities concur with Mr. Canning's finding generally, but the market outlook differs somewhat in Toronto.

Toronto appraiser Wayne Crawford, AACI, says that while good buildings have always been a wise investment, the market was hit hard by competition from the condominium boom in the 1980s, and again by the latest round of rent control legislation. "I have never seen prices stall out as fast as they did in 1990 when the Housing Minister announced the new Act," Crawford says. "Under rent control in the past, legal rent was close to the economic rent. Right now, we're in a situation where in older, less well-maintained buildings, it is not possible to achieve the legal rent. Low rent property is going begging."

The Toronto apartments market is recovering over time, Crawford states, and some sales activity is beginning now.

In Ottawa, Ontario's second largest urban area, good quality apartment buildings are expected to hold their value, says appraiser Dennis J. Devine, AACI. [unreadable word] were affected somewhat in 1990, and owners of the older stock my have [unreadable word] recouping the costs of repairs or of complying with the new Ontario Fire Marshal's code. Landlord here are expecting to pay as much as $600 a unit to come up to the new code.

Demand for rental accommodation has slowed in Ottawa somewhat, says Devine, probably due to low interest rates and government-sponsored home ownership programs.

the economy in Thunder Bay has been protected from the economic downturn, says appraiser Vesa Jarvela, AACI, and has not seen a diminution in the sale price of apartment buildings. "In fact, there has been increased interest in upper end rental," he said. "Not all people here are sold on the condo concept; I also think because returns on investment are low right now, some people are seeking rental accommodation to free up capital and maintain their current lifestyle."

Apartments in Thunder Bay have continued to escalate in value, Jarvela says, which points to their value. "It just shows you," he concludes, "the basic rule: in good times or bad, tenants require and landlords will acquire rental property."

The Ontario Association - Appraisal Institute of Canada is the professional association for real estate appraisers. Dedicated to high standards for the profession, the Appraisal Institute of Canada awards the AACI and CRA designation to members who have met stringent requirements for education and [unreadable word].

For more information, please contact:
Jane Wilson
Ontario Association - Appraisal Institute of Canada,
Public Relations,
613 - (the given phone number is no longer valid).

Highlights of the London 20-year Apartment Study

This document was downloaded from Ontario Tenants rights.
  • Impressive overall performance: average landlord saw annual increase in rent of 5.4% under rent control from 1975 to the present; average annual capital appreciation was 10.7% for high-rise buildings and 13% for low-rise ("walk-ups")
  • most investors held the property for three to seven years, on average
  • vacancy rates did not appear to have an effect on value
  • investors relied as much on "subjective" factors as objective
  • there was no correlation between the age of the buildings and capitalization rates; one would think that newer buildings would have had a lower rate and therefor be more attractive to an investor, but lower operating costs yielded a higher net income
  • no effect on apartment values from fluctuations in interest rates
  • final analysis: the investor who incorporated good management, instituted annual repairs and maintenance, and purchased the building with proper cash-to-mortgage ratio received the greatest financial rewards.

This document was downloaded from Ontario Tenants rights.

A 20 year study of the Apartment Market Within the City of London, Ontario

After studying the apartment market for the last two decades, this real estate product, through two Recessions, Rent Controls, and eradicate swings in vacancy rates, has clearly demonstrated that they have been good investments. This article will show the investment cycle of apartments over the last twenty years in terms of why Rent Control helped and not hindered the market, how vacancy rates nor the ages of the buildings had any bearing on capitalization rates, what capitalization rates occurred over this period, and the impact of interest rates on apartment values.

The analysis represents a sales history of 40 unit buildings and over which had sold during 1971 to 1992. The sales were divided into Highrise and Walkup categories to capture the majority of serious apartment investors. The selection criteria was for any buildings that did not appear to be arm's length were omitted as well as buildings that received any type of government financing or were purchased for condominium conversion. The data results are shown on the enclosed graph. The sales data was considered against the bank prime rate, vacancy rates, Rent Controls and the appearance of two recessionary periods. Although, the analysis did include capitalization rates and Gross Income Multipliers the results have not been included in the graph for confidential reasons.

Overall, the performance of the apartment market (1971-1992) has been impressive simply because of the shear nature of the product. Rent Controls have had only a very little impact on apartment markets and it appears to have had only a small negative impact during the early stages of implementation. Even the current 1993 legislation will not have a negative impact on future values. The reason for this is the nature of the investor. Our study showed that the typical investor when they bought apartment buildings viewed the RTC has a given or a fixed item that was a reality of the market place. Purchasers did not react to every bit of legislative change and/or newspaper articles concerning the NDP and rent controls. Buyers of apartment bought subjectively not objectively. Their's was largely a choice of the mind based upon a number of factors including personal investment criteria, condition, and location. The survey also showed that although a building with a preferred location may not have higher rents, purchasers were prepared to pay more. There simply was a perception, real or otherwise, that the building with the preferred location decreased the overall investments risk. No analysis of the premium paid for location was made but it was an important consideration to investors.

Prior to Rent Controls, landlords had to cautiously approach the tenants for rent increases. This has been echoed by many long term landlords. With Rent Controls in place, landlords did not have to go to tenants "Hat in Hand". There appeared to be a comfort to the landlord that rent increase which have been sanctioned by Government as opposed to supply and demand. The only apartment investor that did not benefit from Rent Controls were landlords who tried to circumvent the system. The landlord, under RTC, saw an average annual 5.4% increase in gross income from 1975 to present. Relative to other real estate investment that was a much better return overall. More importantly, the apartment investor saw a better return on their net income and capital appreciation. The average annual capital appreciation for highrises was 10.7% for highrises and 13% for walkups. The higher increase in walkups was due to the perceived risks in that type of product as opposed to the highrise building. This would explain the larger swings in capitalization rates for walkups which were noted in the study.

The holding period for apartments appeared to be very wide spread. The only consistent patterns for both types of product was from 1973 to 1979 where teh period was between 3 to 5 years on average. During 1983 to 1987 it was 3 to 7 years. After 1987 the holding period was between 3 to 20 years. The study concluded that most apartment investors (highrise and walkups) held their investments for 3 to 7 years on average.

Vacancy rates did not appear to have a large impact on value. The only observation that could be made wast that there was a consistent pattern to low vacancy rates and market activity. This was observed from 1985 to 1990 which was the most economically trouble free period between 1971 and 1992. Even decreasing vacancy rates between 1973 and 1977 did not show an increase in apartment market activity. This was due to the small recession of the mid 1970's and the rumours of Rent Controls may have on property values.

The study did reveal interesting results in capitalization rates. The capitalization rates for highrise apartments had been consistent with an average annual rate between 9.73% with swings between 8.1% to 12.3%. The only difference was during the recessionary period between 1984 to 1986 when the rates varied between 10.3% to 12.3%. The rates for walkups were more sporadic and frequented in the 10% to 11% range. The average annual rate was 9.9% with low and high swings between 7.2% to 10.8%. Since all of the ages of the buildings were known, there was no correlation between ages of the buildings and capitalization rates. This was found to be interesting since one would think that a new building would have a lower rate and would appear to be more attractive to the investor. Perhaps the higher rents and possible less operating costs yielded a higher net income with a perceived rate, say 10%, as being part of the investors criteria.

The rise and fall of general interest rates did not make any significant difference on apartment values during 1971 to 1992. However, during high recessionary periods when the bank prime rates were well above normal market levels (1979 to 1983) an (1989 to 1990) apartment values did fall with market reaction times 2 years after high bank rates started to fall. Viewing the current recession and decreasing interest rates it would seem logical that apartment value should increase. The first quarter results for 1993 have shown no upward trend in values. On the other hand, it is difficult to formulate that apartment values are falling as they did during the last recession. The current recession has bottomed out and with pending changes of government at the provincial and federal levels; it is anticipated that there will be a rise in apartment values from 1994 to 1996 with a leveling off of values from 1997 to 1999.

Our final analysis conclusively showed that the apartment investor who incorporated good management, instituted annual repairs and maintenance, and purchased the building with a proper cash to mortgage ratio receive the greatest financial rewards. The buildings that were over financed, in poor location, and were not well managed showed periodic but stable decreases in value since they were built. It would appear that these investors were in for a short duration with no investment strategy or sufficient funds to properly maintain the building.

It was also interesting to learn that most apartment investors responding to or relied upon the overall capitalization rate and the gross income multiplier as investment tools. The equity dividend rate was found to be largely the figment of the appraiser's imagination because it did not exist in the minds of the majority of apartment investors interviewed. This would question the validity of the Mortgage Equity Technique. However, maybe this could be addressed in a future article.

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Note: Where it reads "[unreadable word]" that is because that particular word could not be read because of the quality of the FAX document.

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