May 1, 2020 | Where Renters Rock

Let’s talk rent.

First, all those house-lusty, first-timer, newbie moister buyers out there should understand the days of fist-over-fist price appreciation on entry-level homes (we’re talking condos here) are done. Kaput. Stick a fork in it. There were lots of reasons not to buy before Covid came to town. Now there are reasons to bail.

Advice: only buy a condo if the total of: the financing charges + monthly condo fees + property taxes + insurance + the opportunity cost of the downpament are less than rent for the same unit. The odds of this happening in most markets (Calgary may be the exception) are about zero.

Why?

Simple. Capital appreciation can no longer be considered a certainty. So without annual hikes in the value of your unit, why would pay more every month to live there as an owner, rather than a tenant? Especially when real estate costs a ton extra to buy and sell thanks to land transfer tax, legals and realtor commission.

Besides, a one-bedder in a concrete urban tower isn’t going to be anyone’s F House. Almost nobody moves into their forever home off the bat, which means you want liquidity when climbing the property ladder. Only buy what you can sell easily – and for enough profit to make all those extra ownership costs worthwhile. One lasting impact of the pandemic will be to render condos in the biggest, tallest, coolest buildings sinkholes of value.

By the way, renters are starting to rock in Toronto. Lease rates are falling. Selection is rising. Competition is going away. Thanks, pandemic!

The rental market in the country’s biggest city is changing by the day. Freaking-out Airbnbers are (as predicted) dumping their empty units onto the market since the travel/visitor sector is dead. Many of these are ‘professional hosts’ with multiple units and mega-financing. They can’t afford to carry empty condos, and so are (a) listing or (b) renting in a hurry.

Meanwhile (again thanks to the virus) the number of new renters is shrinking along with incomes, job opportunities and the population in downtown office towers. So while the number of rental units has jumped by 25% recently, showings and new leases have collapsed. Rents have started to fall – down about 4% in a month, with more to come.

So, yes, the bootie is on the other foot now. Amateur landlords are under financial pressure and more willing to lease or sell at a competitive price. Given the fact half of all city condos were bought by speculators and small-time investors, expect a lot more pressure to come as the vacation rental market disintegrates. First-time condo buyers today must have a powerful reason to proceed. I have no idea what that might be.

Now, how about the big guys? The real estate investment trusts owning thousands of rental units? There’s been a lot of talk here lately about rent strikes, deadbeat tenants, massive job loss, financial distress and the fact renters can cease making payments but can’t be evicted, as the virus has shut  government agencies and the courts. So, surely, residential REITs must be clobbered? In fact, the depressed price of trusts on the market today suggests this is the prevailing meme.

Crap, says CAPREIT, one of the largest apartment-owning trusts in Canada, with a whopping 56,800 suites and townhouses in its $800-million property portfolio. This week management issued this statement:

“Looking ahead, we strongly believe our business, and the multi-family real estate sector in general, remains a highly defensive and counter-cyclical asset class that can bear the broad market swings we are experiencing. With the strongest balance sheet and financial position in our twenty-two-year history, we have the resources to weather this storm.”

Just corporate bafflegab to drive the unit price higher? Of course, but look at this: CAPREIT collected 98% of all the rents owing to it from tenants in April. The number of renters on deferred payments equals less than one per cent. Occupancy is sitting at 98.2% of its units, and the trust is actively marketing the vacant ones, striving for 100%.

And this REIT, like the others, is benefiting mightily from the collapse in interest rates. The overall loan-to-value ratio is just 35%. The trust has about $150 million in cash. The average 10-year rate on its mortgages is 2.01%, and it just locked up another $45 million in mortgage financing at 1.59%. Given inflation, that’s basically free money.

But look what Mr. Market has done: CAPREIT was trading at about $60 when the virus swept into our lives, then dropped by 30%. It’s now recovered some of the loss and sits around $47. Lots of volatility, despite a business that continues to throw off big cash flow, where tenants are being responsible and crashed interest rates are filling the coffers. Oh yeah, and it pays investors income.

Amateur landlord? Fuggedaboutit. Condo owner? Hope you like losses. REIT investor? Smart. Renter? Sweet. Renter with REITs? Genius.

Garth Turner May 1st, 2020

Posted In: The Greater Fool

Next: JPM Fixed Income Head: Market Optimistic Before Horror of Data Hits »