Investment in Canadian apartment buildings on pace to challenge 2018′s $8-billion record
Investors spent a record $8.38-billion purchasing apartment buildings in Canada last year and another $4-billion in the first half of 2019, a sign that higher rents and low vacancy rates are attracting more capital to the sector.
Commercial real estate firm CBRE Canada says in a new report that multiunit residential rental buildings have become one of the hottest real estate asset classes in Canada. Sales volumes climbed 31 per cent in 2018 over 2017, marking the fourth consecutive year of rising sales.
CBRE Canada vice-chairman Paul Morassutti said more deals are coming in the second half of the year. “Our entire national investment team is telling us that the pipeline for the rest of the year is very, very full.
If sales do not top 2018, it will not be because investor demand is waning, he said, but because there are so few rental buildings available for sale.
Mr. Morassutti said there is little inventory on the market because many landlords are reluctant to sell assets that are performing so well and because many individual owners are also concerned about the capital gains taxes that will be owed when they sell their long-held assets at a huge profit.
The CBRE report said Canada’s population growth has combined with the rising cost of home ownership and a lack of rental supply to drive up demand for apartments and push rent levels higher.
The result is a growth in returns in the multifamily apartment sector, averaging 9.8 per cent as of March this year. Investment returns on apartments were second only to the booming industrial sector for the 12-month period ending in March.
Mr. Morassutti said multifamily rental investments have long been a safe harbour in volatile economic conditions. But with rents climbing quickly in most parts of Canada, apartment buildings are suddenly offering soaring returns combined with lower risk.
“What’s happened over the last few years has been that you take the safe, stable secure characteristics of this asset class and you now add in a significant growth element, and it’s really the combination of those two things that is making is so attractive to investors,” he said.
Apartment building rents climbed 4.4 per cent annually over the past two years in Canada.
Canada’s national vacancy rate was 2.4 per cent in 2018, remaining well below the 10-year average of 2.6 per cent.
Private investors accounted for 31 per cent of apartment building purchases in 2018, followed by pension funds at 26 per cent, private equity funds at 16.5 per cent, foreign investors at 13 per cent, and REITs at 11 per cent, the report said.