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Apartment valuations set to keep climbing in Ontario: report
By Garry Marr, Vancouver Sun – May 23, 2012
Valuations for apartment buildings reached record levels last year and the forecast for 2012 is for the trend to continue, according to a new report on the sector which focuses on Ontario.
The Rock Apartment Report Ontario notes the capitalization rate — the ratio between the annual operating income and value of a property — is now at 5% or even lower for some prime apartments in the province.
It continues a trend that first started in 1998 when the government eased rent control rules to allow landlords to increase rates when a tenant exited a property. Whereas cap rates were once as high as 10% in the mid 1990s, reflecting the diminished valuation of properties, they reached 7% after the legislative changes. By 2005, that 7% was no longer just the floor but the ceiling.
“In 2011, deals are setting new benchmarks,” says the report. “In 2012, a combination of forces are reshaping Ontario’s purpose built rental apartment market into a favourable place to develop and invest.”
Even at those low cap rates, deals still makes sense with government of Canada 10-year bonds trading near 2%. “Everything comes down between the spread between interest rates and cap rates,” says Derek Lobo, chief executive of Rock Advisors Inc. and author of the report. “Historically when interest rates were 8%, cap rates were 10%. Now interest rates are 2% and cap rates are 5% so the spread is pretty good.”
His company has ranked Ontario’s top cities for apartment investment and the report can be found at ww.rockaptadvisors.ca.
The top choice is Vaughan/King/Richmond Hill area north of Toronto, followed closely by Markham to the northeast.
“In the city of Toronto, you have 10.17 apartments per 100 people. Go to Markham and it’s .53 — that’s 20 times more apartments,” says Mr. Lobo, adding it reflects the fact apartment construction grinded to halt when rent controls were put in place in the 1970s.
Add in the fact that they have tremendous income in the markets north of the city with plenty of population growth, and it’s ripe for apartment ownership.
“It just doesn’t get better than short supply, rich people and more people,” says Mr. Lobo. “That’s why the whole area around the GTA is in the top five.”
The only area outside southern Ontario that makes a dent is Ottawa at number two. “There is a lot of foreign investment, but Ottawa is also the capital and the capital spells stability,” says Mr. Lobo.
His report notes that overall stock market volatility has turned more people towards the apartment sector and says increasingly apartments are coming under the ownership of portfolios held by institutions, pension funs, private equity investors and real estate investment trusts.
Despite the changes in rent control, he doesn’t see a huge increase in purpose-built construction with much of the supply boom coming from the condominium sector. There are about 1.4 billion apartment buildings in the province and only about 1,000 have been built in the last year.
Most of the supply in sector has come from condominiums. In Toronto, there were 69,000 condominium apartments built between 1996 and 2005. The pace has picked up. The city added 15,000 units in 2011 alone.
“The common connection is low interest rates. Low interest rates give the homebuyer more bang for their buck and low interest rates are giving the apartment buyer more bang for the buck,” says Mr. Lobo.
Source: http://www.vancouversun.com/touch/business/story.html?id=6666538
