In this edition of the Bird’s Eye View, we provide summaries and commentary on federal budget initiatives through the lens of private real estate investment. We focus on items that have seen less commentary from media, such as the potential freeze of development cost charge increases in communities over 300,000 population, and the Public Lands for Homes Plan, parts of the recently released Solving the Housing Crisis: Canada’s Housing Plan .
In this edition of the Bird’s Eye View, we explore the stages of the real estate cycle, focusing on the multifamily asset class, and compare the very different positioning between the United States and Canada within this cycle. Let’s explore this tale of two countries!
In this edition of the Birds Eye View, we aim to improve on the traditional experience of looking under the hood by giving you a guided tour of the multiplex development strategy in BC, which has gained momentum following BCs recent housing legislation changes.
In this edition of the Bird’s Eye View, we highlight 3 strategies within private real estate that we think will offer opportunities for superior risk-adjusted returns in 2024, and share our thoughts on why.
In this edition of the Bird’s Eye View, we provide a summary of 7 different amendments to housing law (one federal change, and six provincial changes), and share our thoughts on how we think these changes will impact investors.
In this edition of the Birds Eye View, we cover what cap rates are, their relationship with interest rates, then dive into why seeing negative cap rate spreads is so strange.
In this edition of the Bird’s Eye View, we take you on a deeper dive through both the art and science of one of these variables: rental rate growth.
Government plays a massive role in the supply and demand equation for housing. From the Federal down to Municipal governments, there are dozens of policies that affect housing. As an investor, you don’t need a deep understanding of the policies themselves, though you do want to understand the effects these policies have. This edition of the Bird’s Eye View will look at BC’s Energy Step Code program, outline how it is affecting development in BC, and conclude with how investors can best position themselves as governments march toward ‘net-zero’ housing. While this article focuses on BC, the trend of requiring more energy efficient housing appears to have some degree of national traction, and we anticipate that these types of policies will become more common in all Provinces, though the specifics will likely differ. BC Energy Step Code In BC, the Provincial Government’s plan to increase the energy efficiency of newly built, and renovated buildings, is called the “BC Energy Step Code”. Developers need to get into the weeds and work with “energy advisors” to review plans, model energy consumption, and ultimately, ensure that certain energy efficiency thresholds are met. As investors, what you need to know is that today, all new buildings in BC must be 20% more energy efficient than they were required to be in 2018. By 2027, that number will be 40%, and by 2032, a whopping 80%, where new buildings will be “net-zero energy ready”. However, municipalities may choose to implement these timelines even sooner. Some municipalities, such as Richmond, Surrey, North Vancouver and West Vancouver, have already implemented municipal bylaws to accelerate these timelines.
“When the tide goes out, you see who is swimming naked.” - Warren Buffett
The dramatic rise in interest rates continues to reverberate through the real estate market. As a result, strategies that made sense two or three years ago may not in the current market. On the other hand, some strategies that were less appealing to us in recent years are now quite compelling. Enter preferred equity. Preferred equity sits between debt and equity on the capital stack, meaning it is paid back after debt, though prior to equity investors. As such, projected risk and returns usually fall somewhere between debt and equity. For most of the last decade, which has been characterized by strong market fundamentals and abnormally low interest rates, common equity holders have been richly rewarded for any additional risk taken. Annual returns of over 20% have been common-place. The upside was too good to pass up. The rapid rise of interest rates has since thrown cold water on the market, leading to declining prices in most asset classes. This has knocked common equity investors' return-expectations down a notch or two and losses and cash calls are becoming more common. The current economic climate also makes it much more difficult to decide what to do next. Preferred equity presents a compelling option if you believe medium-term growth for real estate assets will be more moderate and a collapse from today’s prices is unlikely. This scenario could produce equity-like returns for preferred equity investors without equity-sized risk. One place we are seeing preferred equity opportunities is in the US Multifamily market. Particularly with properties purchased within the last two years using bridge financing, which has been commonplace. For many multifamily investors, their intended strategy when they purchased the property was to increase net operating income and then refinance at lower interest rates, anticipating that they would achieve long-term financing between 70% and 80% loan to value (LTV). Due to falling values and increasing lender caution however, many borrowers have only been able to refinance between 50% and 60% LTV, leaving a gap in their capital stack. This creates an opportunity for preferred equity investors to provide an additional 10-20% of the capital stack, while still having substantial common equity behind them. There are numerous properties that will need to refinance in the coming quarters, and many see preferred equity as a natural solution to plug the gap. Current demand for preferred equity puts investors in the driver's seat to negotiate terms, and can often demand 12-14% returns, which we believe are quite attractive in the current environment. While we don’t have any current opportunities in preferred equity, we are exploring options. We look forward to discussing this strategy further should a deal present itself. As always, if you have any questions or there’s anything we can do to help, please don’t hesitate to reach out.
