Archive for year: 2016
The BIG hit of the month!
Asset Class: Multi-Unit Residential Building
Loan Amount: $4,931,800
Term: 10 Years
Amortization: 25 Years
Details: Conversion of 39 to 57 housing units
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MACC – Your Commercial Mortgage Solution
MACC secured funding for a $4.1M loan on June 27th at a rate of 1.88% for a 5 year term!
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With its playful indoor slide and five-storey “bio-wall” of greenery, Toronto’s five-year-old Corus Quay building—the headquarters of Corus Entertainment—served as an inspirational backdrop for attendees of Fortress Real Development’s “Listen, Learn and Lunch” event three years ago. Attendees at the glitzy real estate event on the shore of Lake Ontario noshed on sliders and listened intently to speeches by several Fortress executives, including CEO Jawad Rathore and chief operating officer Vince Petrozza, as well as star local developers like Toronto “condo king” Brad Lamb. “There’s many ways to make money in real estate,” Lamb says in a heavily edited video of the event posted on Fortress’s YouTube channel, complete with jaunty music. “But one way to make money in real estate is the safe way, which is buying Fortress investments.” A few moments earlier, a Fortress exec trumpeted the value of the firm’s partnerships with Lamb and a Windsor, Ont.-area developer named Charles Mady, saying they are “some of the strongest partnerships you can imagine being part of.”
Fast forward to 2016: Fortress has taken over one of Mady’s projects in Barrie, Ont.—a building with 82 condo units and an eight-storey office tower—after both the development and developer ran into financial trouble. It’s a good thing Fortress stepped in, too, otherwise potentially hundreds of investors who funded Fortress’s contribution to Collier Centre through what’s known as a “syndicated mortgage” may have lost their shirts.
It was stark reminder that there’s no sure thing in the investing world, including Canada’s supposedly “proven” real estate market (to borrow another term from Fortress’s marketing). Yet Fortress has ridden a wave of enthusiasm for its housing and condo projects in recent years, as eager investors, many of them already homeowners, have sought to double down on their exposure to that overheated sector of the economy.
Headed by Rathore and Petrozza, Fortress Real Developments promises to scout out “high quality” projects with “top developers” across the country, including condos in relatively sleepy centres like Barrie, St. Catharines, Ont., and Regina. The firm then offers developers services that include everything from “analyzing and buying the land, to hiring the architects, to building the sales centre to retaining the planners who obtain permits and approvals from the city to improving the quality of the rental units.”
The real magic, however, happens on the back end…. To continue reading click here.
According to Real Capital Analytics, $533 billion of commercial real estate changed hands last year, up 23% from a year earlier. The volume also was roughly 4% more than what had been projected as of November 2014.
The total was still well shy of the record $574.9 billion of deal volume that took place during the market’s peak year of 2007.
Foreign investors accounted for $91.1 billion, or 17.1% of the transaction volume last year, up from the 10% average in each of the previous four years. The foreign charge was led by the Canadians, who completed $24.6 billion of deals. Those investors include the Canada Pension Plan Investment Board and Caisse de depot et placement du Quebec (CDPQ). Ivanhoe Cambridge, an affiliate of CDPQ, purchased Manhattan’s Stuyvesant Town/Peter Cooper Village apartment property for $5.3 billion late last year.
Investors from Singapore took the second largest piece of the foreign investment pie, completing $14.8 billion of deals in 2015. Norway followed with $8.5 billion of deals, and Chinese investors completed $6.8 billion of deals.
Under normal circumstances, foreign investors would likely increase their activity going into 2016. After all, certain restrictions have been eased as a result of changes to the Foreign Investment in Real Property Tax Act. (These changes were implemented with the passage of the Protecting Americans from Tax Hikes Act of 2015.) For instance, foreign pension funds are no longer are subject to withholdings under the original act.
However, many foreign investors are likely getting pinched by the sharp drop in oil prices. According to analysis by Morgan Stanley, Norway, the United Arab Emirates and Qatar combined for $18.6 billion of U.S. deals, a substantial volume. Since each country is reliant almost exclusively on oil revenue, their ability to generate cash will decline with the drop in oil prices.
In fact, as oil prices were plunging last year, sovereign wealth funds were redeeming capital from investment vehicles (not necessarily tied to real estate) to which they had committed. Morgan Stanley found that some $100 billion of capital was redeemed from 11 asset managers by oil-dependent investors last year. That trend could continue this year if oil prices continue to decline, or stabilize at today’s lower prices.
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“It’s still a humdrum outlook for the Canadian economy,” says Avery Shenfeld, Managing Director and Chief Economist, CIBC World Markets, “but we can blame the tepid global economy for part of that. The bright spot is that 2016 should be a bit better than 2015, as we move past the steepest declines in oil sector capital spending. And we’ll get the first leg of some federal government infrastructure spending in the latter half of 2016, so the sectors of the economy that benefit from construction spending should be healthy.”
Shenfeld calls investors’ attention to six major factors in planning for this year.
1. The promising U.S. economy. “The brightest spot for Canadian exporters in 2016,” says Shenfeld, “is the big market to the south. The U.S. isn’t as affected by the sluggish pace in emerging markets, because its own domestic market is so critical.” Plus, Americans have been getting jobs so they have newfound income to spend. Shenfeld thinks the American consumer “will provide the engine to drive 2.3% real GDP growth in the U.S. in 2016, similar to the 2015 pace.”
For Canadian exporters, this is good news. Everything from autos to lumber to engineering services will benefit from a continuation of a relatively healthy U.S. economic expansion.
2. The lower Canadian dollar. The lower dollar, which is actually close to its historical norm, notes Shenfeld, is a major reason for the Bank of Canada’s positive outlook on recovery. It’s also a signal that it may hold our interest rates below those of the U.S., to prevent a return to a stronger Canadian dollar. “The evidence is that we need a currency at this level to boost exports,” says Shenfeld, “so we’re unlikely to see much of an appreciation for the year.”
3. Tourism. In addition to the Canadian services exporters who gain from a lower dollar, our tourism sector benefits. For winter sports enthusiasts, the lower dollar makes skiing in Western Canada an attractive alternative to resorts in the U.S. Similarly, for both Canadians and Americans, the Maritime provinces and Newfoundland offer a more reasonable summer vacation than destinations in New England.
4. Interest rates. The Bank of Canada’s only tool is “a blunt instrument,” says Shenfeld. “You’re not going to raise interest rates to cool Toronto and Vancouver housing prices … and then chill the whole economy in the process.” If anything, the burden on the Bank of Canada is to keep interest rates low, to provide off-setting momentum and to fill the hole left by the retreat of capital spending in energy and mining.
The U.S. Federal Reserve has raised interest rates, which could push up Canadian five- and ten-year rates marginally. “But if you’re thinking: When will we get back to the day I earn 5% on a GIC?” says Shenfeld, “The answer is: not soon, and certainly not in 2016.” The economy is showing that it needs low interest rates to achieve even modest economic growth. Not just in Canada, but globally.”
5. Oil prices. Some signs indicate oil prices are too low to be sustainable; U.S. drilling is cooling down, putting downward pressure on supply in 2016. But Shenfeld argues that American shale oil has now jumped ahead of the Canadian oil sands in the queue, so it will be the first to come back onto production as prices rise. One day, the world will need an expanded supply of our more expensive oil. “But that is not likely to be a story for 2016, or perhaps not even in 2017,” says Shenfeld.
6. Emerging markets. Emerging markets, including the BRIC (Brazil, Russia, India, China) countries, had a difficult 2015, although overall long-term growth possibilities are higher than those of established economies. “The growth engines of China are shifting away from industrialization and construction to the service and consumer sector, which doesn’t help to drive our raw material exports,” adds Shenfeld. “China was the world’s largest consumer of base metals when it seemed like they were building a new city every week, but those days are fading fast.”
Opportunities and Challenges
A well-balanced, diversified portfolio always makes sense, particularly so in an uncertain world, says Shenfeld. “Canadian equities have had a rough year in 2015,” he adds, “but we see some upside in the non-energy, non-materials part of the Canadian equity market. It’s been collectively undervalued because there have been question marks in global investors’ minds about Canada. Some see us as another Saudi Arabia with the whole economy resting on oil, and that’s a long way from accurate.”
“In fixed income markets,” says Shenfeld, “long-term bond yields may start to creep higher because they are moving up in the U.S. So we lean toward somewhat shorter-term bonds to avoid the capital depreciation, or price depreciation, that you get at the long end if rates rise.” He recommends talking to your Investment Advisor about fixed income alternatives in 2016, given that yields on government bonds and GICs are so low.
Shenfeld is still cautious on gold. “You need either a material inflation escalation or a plunging U.S. dollar to really get the price of gold moving,” he says, “and we’re not seeing either.”
Shenfeld cautions Canadians not to be totally out of any asset class, nor restricted by a single geography. “Canadians should think of their retirement and travel plans and consider whether they have enough money in countries where they might one day spend a considerable portion of their year. If you’re planning to spend your winters in Florida when you retire, but have no U.S. dollar assets, you’re actually betting that the Canadian dollar will appreciate,” he says. “You can hedge that risk by having some of your portfolio in U.S. currency.”
It’s always a good practice to connect with us early in the year to discuss your financial goals – consider putting a reminder in your calendar for the beginning of the year. As always, if you have any questions about your accounts or any of the information contained in this newsletter, please contact us.
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