Welcome to my blog on housing, culture, and design in Toronto, Ontario, Canada.
Real estate in Canada, like many places around the globe, is a multifaceted thing; it serves our basic need for shelter, provides psychological benefits like feelings of comfort and security, is an important part of our self-expression (here’s my read called: Housing As A Symbol Of Self), but also serves as an investment opportunity to create financial wealth; it is this last objective – competing with the rest – that is causing a growing disconnect between what ‘Home’ represents and what is has become.
As the potential to grow wealth increases, the investor pool grows, and the housing market becomes financialized.
However, this is a trend that has been creating an uneven playing field, both for renters, first-time buyers, and even Mom and Pop property investors. Those looking to get onto the property ladder, or purchase investment properties for personal financial freedom or security in retirement, are increasingly competing with corporations, pension funds, and real estate investment trusts (REITs), who have deeper pockets and tax advantages. With these groups, there is a particular focus on turning profits, which can come at the expense of the end-user of this product – the renter.
It becomes a battle between affordability and profits.
Today, in an interview, Green Party leader Annamie Paul said “A house is a home. It is not a commodity.” While the statement is not quite true in the literal sense, the sentiment is clear. Expect the issue of housing to coninue to heat as we draw nearer to the Canadian Federal election.
Let’s take a look at what’s going on in the Toronto real estate market in regards to REITs, pension funds, and other corporate investors.
The Commodification Of Housing
When a dwelling is treated as an asset first – and not shelter as one might wish – the objective is almost always to increase profits. This is accomplished by finding whatever mechanisms exist to increase rents – and lately, we’re witnessing a growing focus on what’s called “turning” the units. Instead of valuing a long-term tenant and potentially assisting them while they may be going through economic hardship (ie. cut them some slack when the rent is behind), landlords are following the letter of the law and concentrating on replacing existing tenants who default on their rent (or are deemed a nuisance) with new renters who will pay the highest market rent as a means to release themselves from provincial rent controls.
This article sums up the dilemma nicely: “The Rise Of Financial Landlords Has Turned Rental Apartments Into A Vehicle For Profit“.
These companies drive revenues by expanding – which means buying more properties, but also by increasing revenues by charging higher rents. That in itself is problematic; while all property investors aim to generate a profit with their property holdings, institutional investors have different motives – mostly to turn profits for shareholders or pensioners. They also receive favourable tax benefits from the government, as well as support from the Crown Corporation Canada Mortgage & Housing Corporation (CMHC). Additionally, these corporate movers have tapped into the low-interest rate environment and refinanced debt, allowing them to grow their portfolios more easily.
And it’s not just renters that struggling with affordability. Small-scale investors – which used to be the typical condominium investor, buying a unit or two for the purpose of renting them out – are being financially muscled out by the institutional investors, who have much deeper pockets to draw from.
Because these larger investors have a lot of capital available, they’re willing to snap up rental properties at premium prices even if the property itself isn’t going to generate a high income immediately. Because they’re playing a long game, they can take bigger risks and pay higher values to lock down products others might purchase. For example, we’ve seen institutional investors snap up entire condominium developments with the objective of turning the complex – like The Selby, a 50-storey, 441-unit luxury apartment at 592 Sherbourne Street in downtown Toronto – into purpose-built rental units. With a scarcity of land for new development and a growing need for rentals in the GTA, this is a lucrative proposition.
The growth of these institutional investors in the housing market is predicated on their generating as high a return on investment as possible for their investors. When the Covid19 pandemic impacted the Toronto luxury rental market, which is what a lot of pension funds and REITs have been focusing on as part of their portfolios these past few years, they shifted their focus to the acquisition of older high-density rental projects constructed in the 1960s and 1970s. Once secured, these companies execute superficial cosmetic renovations while ignoring the upgrading or replacement of major building components. New tenants rent the appealing renovated suites but only occupy it for the one year lease when they realize there are larger more critical system failures (like elevators breaking down, heating/cooling issues, etc), while the management continue to raise rents, pursue evictions and keep the cycle of tenant turnover high. Investors are the key actors, here, not people who need decent housing.
The concern, as “Billions Of Dollars Worth Of Canadian Apartment Buildings On The Block As Sellers Rush To Cash Out At Record Prices“, is that Canada has only recently seen new rental development, meaning roughly 80 percent of the country’s entire supply of apartment buildings at least three decades old. This Toronto Star article “The Big Business Behind The Affordable Rental Housing Crunch” provides a snapshot of how this focus on profits impacts real-life renters and breaks down some of the numbers.
More recently, this past June, a company called Core Developments announced they were going to purchase $1billion in single-family dwellings across the country (but not in expensive cities like Toronto and Vancouver), add basement apartments, and rent them as part of their investment portfolio. The backlash was quick and cutting, signaling that the Canadian dream of owning a detached dwelling is highly prized and then intentions of this investment firm were not welcome. Yes, apparently it’s ok to purchase a condo tower and convert it into rental housing, but don’t touch anything with a backyard. Here’s an overview in CBC’s “Outrage Over Developer’s Plan To Buy Single-Family Homes Reveals A Canadian Fixation“.
About Pension Funds & The Rise Of REITS
In January 2021, a news piece called “Canadian Pension Funds Hunt For Pandemic Real Estate Bargains” shares that Canadian pension funds held $278.7 billion in global property assets in 2019, up 4 percent from 2018, according to the Pension Investment Association of Canada, making them the country’s largest real estate owners.
For interest’s sake, with all the focus on foreign investment and eroding affordability, the latest data from Stats Can showed that non-residents owned 3.4% of all residential properties in Toronto.
Here’s a 2015 article in the Financial Post called “Pension Funds Swoop In On Downtown Toronto Condo Towers As Rental Market Heats Up“. It is not uncommon for a pension fund to partner with developers to build condos, like “Graywood Buys Lucrative Downtown T.O. Development Site” (November 2020) and “Tricon, Canada Pension Plan To Invest In Joint Venture” (March 2021) developing as many as 3,000 multifamily housing units in Toronto valued at $1.1 billion.
Pension funds can cleverly play key roles as major investors, getting a newly constructed rental investment portfolio that they acquire for as close to cost as possible. Of they can even become the de facto developer, like Cadillac Fairview, the wholly-owned real estate subsidiary of Ontario Teachers’ Pension Plan who owns 73 properties, 38 million square feet of floor space, construct both rental buildings and condominiums, and are worth $296 billion.
Or the development firm Concert Properties, which have built over 12,000 homes across Canada since 1989, has $7billion in assets and is owned by 19 Canadian pension funds. And Oxford Properties (owned by OMERS, a defined benefit pension plan valued at $15billion) & Alberta pension fund AIMCo (with $15.5billion in real estate of which 15% is residential) announced in January 2020 they’re creating “‘Canada’s Largest Development In History’ At SquareOne In Mississauga“.
Meanwhile, in an August 2020 Institutional Investor article, “The World’s Best Pension Funds Are Canadian. Sorry” stated “Although real assets tend to be more expensive to manage than stocks and bonds, Canadian funds allocate 18 percent of their portfolios to this area — or double the allocation of their global peers
In the last three decades, REITS have gone from owning no buildings to just under 200,000 in 2020. The largest financial firms in the company hold almost 25 percent of the purpose-built rental stock in the country!!
This Globe and Mail article “Investors account for a fifth of home purchases in Canada. Are they driving up housing prices in a booming market?” says that in the past year there have been apartment deals totaling $12.9B according to Avison Young. In that number, two heavy hitters- Starlight Investments and KingSett Capital, bought 27,000 apartment units. Towards the end of 2020, they bought several hundred short-term rental apartments across Canada for a sum of $4.9B.
This July 2020 article called “Invested In Crisis” shares a litany of bad behaviours by pension funds and their partners towards tenants when, ironically, “as Canadian workers put their faith and their funds in their future pensions, real estate investment trusts (REITs) which operate tax-free, asset managers, and other real estate investors are working with Canadian pension funds to make housing less affordable to working-class people now”.
This Globe and Mail article, “Sophisticated Investors Are Desperate To Buy Canada’s Apartment Bildings; Values Soar Despite COVID-19” shares how institutional investors have shifted their focus from newly constructed rental buildings that aren’t performing income wise as they did pre-Covid to pursue older aging rental properties that has resulted “in a surge of bidding wars this fall that would routinely draw 10 or more interested buyers that technically extends a trend that erupted one year ago when Starlight Investments bought a portfolio of 44 dated suburban rental buildings containing 6271 units for $1.7-billion. It was among the steepest valuations in Canadian commercial real-estate history, relative to the properties’ rental income.
Back in 2019, I wrote a piece about a documentary called ‘PUSH’: A Documentary On Rising Real Estate Prices, which explores how pension funds, in particular, have reshaped many housing markets. And prior, in 2013, a CBC Doc Zone called The Condo Game delved into the ways our political economy shapes our urban environment, including the profiteering of developers who build ‘cheap’ super towers (CityPlace) that serve not buyers, but the international commodities market with zero regards for the integrity of their product.
In May 2021 in Rabble.ca “Corporate Landlords Favoured By Government Are Making Housing Unaffordable” recounts a meeting between human rights lawyer Leilani Farha – the former United Nations special rapporteur on housing featured in PUSH and now the global director of an international housing group called The Shift – meeting with the House of Commons finance committee recently. While acknowledging the recent budget “commits to a number of measures to address affordability: more money for the rapid housing initiative, rent supplements for women and children leaving violent relationships, and resources for community-based housing”, she called out the government’s “monetary and fiscal policies” that “incentivize housing unaffordability.”
This report from the University of Waterloo professor Martine August entitled The financialization of Canadian multi-family rental housing: From trailer to tower provides a comprehensive look at how housing has evolved as a commodity- and how that has impacted affordability and average people. She chronicles the movement of housing financialization, starting in 2010 with the acquisition of a 10-story 50+ years old apartment building at 200 Dufferin Street in Parkdale by investment firm TimberCreek Asset Management.
Timbercreek was remarkable in their style of asset management, by harnessing the gentrification of Parkdale at the time to renovate the aging building extensively and then re-rent at much higher rates, displacing long-term tenants, many of whom were on fixed incomes. In the past, rental management companies would have taken over a building and been less likely to do extensive updates, given the cost and the market rent. The TimberCreek approach has been used a lot as big companies take over rental properties in the years since.
August argues in her paper that the shift of REITs, private equity funds, asset management companies, and pension funds acquiring rental properties “is fundamentally transforming the multi-family sector, and exposing tenants to extractive business practices that engender displacement.” She discusses at length the role that government policy has played in shaping this movement and suggests that government should focus on better rent control regulation and protect tenants better. Additionally, she suggests that lending practices by CMHC be halted. The government could also introduce a policy that prevents financial vehicles from owning multi-family residential housing “in recognition that this important component of social wealth should not be treated as a financial asset.” She points to success in Germany, where a similar policy has been introduced. They banned REITs from owning certain multi-family residential buildings and have explored things like banning rental housing ownership by large landlords and support for conversion to social housing units.
*Image courtesy of CTV News, with thanks.
With a federal election more than likely looming, affordable housing is THE hot-button issue – as it was during the last campaign. (Read our post ‘What Toronto Real Estate Buyers & Sellers Should Watch For In The 2021 Federal Election‘.) Government policy as it stands right now encourages housing unaffordability for the average person. In general terms, some of the suggestions to bring balance to this situation is to reduce the availability of tax breaks for REITS and others. Also, raising rates may deter some companies from expanding their portfolios, both because it will limit the number of properties that they can buy – as well as limit how much they can afford to pay for them if engaged in a bidding war.
Part of any successful buying or selling strategy involves having a comprehensive understanding of the influences of the market at any given time to help gauge movement and trends to your benefit. With decades of experience, and a finger at all times on the pulse of the market, we are here to help!
Here’s some further reading you may enjoy
The Other Side Of Rent Control And Toronto Real Estate
Maslow’s Hierarchy Of Needs And Toronto Real Estate For Buyers – and – For Sellers
Toronto Real Estate, Yellowbelt Zoning & The Missing Middle: Part One – and – Part Two