Limited partnerships offer part ownership of commercial buildings

Fiona Anderson
Sun

Everyone seems to be making money in British Columbia’s hot real estate market — or at least everyone who managed to get in before prices soared. For the rest of the population, even 400-square-foot condominiums downtown are now out of reach.

But real estate investment is still possible, if you don’t mind owning just a piece of the pie and are okay with someone else saying how it is to be run and when it is to be sold. And of course, provided you don’t need it as a roof over your head.

Joanne Thomas and her husband got into the housing market when they bought their family home. But with the real estate market bubbling, and the performance of their mutual fund “lacklustre”, Thomas wanted to put some of her registered retirement savings into real estate as well.

So Thomas invested in a real estate limited partnership that made her part owner of the historic Pemberton building in downtown Vancouver. With tenants like Cartier Jewellers and Caffe Artigiano, she and the other limited partners will receive a cash flow based on rental revenue, as well as a distribution of cash when the building is sold.

Thomas said the investment seemed like less of a gamble than her mutual fund investments, “which were all over the map.”

“I’m a bit down on mutual funds right now,” Thomas explained. “Having invested over the years . . . I don’t see a huge difference from where I was in the early ’90s.”

The investment also let Thomas invest in commercial real estate, something she couldn’t afford to do on her own.

“It was a great entry level for me,” she said.

Thomas made the investment through Accolade Equities Inc., and it’s the company’s first foray into B.C. after buying a number of properties in Calgary.

But despite being a young company, the concept of real estate syndication has been around for 100 years, Accolade’s chief financial officer Philip Pincus said in an interview.

“But it’s always really been for the rich and wealthy,” Pincus said. “Now by denominating our units at $50,000, we’re more or less giving ‘the average Vancouverite’ the opportunity to own a piece of their downtown office buildings.”

Changes to B.C. securities laws a few years ago has made real estate limited partnerships or syndications more accessible to people who want to invest smaller amounts of money, according to Alan Pratten of Victoria’s Pratten Financial, which has been in the business for about six years.

Each partnership is different, with its own minimum investment and property. But generally, a partnership will buy a building or pool of buildings on behalf of investors. The buildings will generate rent, either through residential or office space or in many cases from retail tenants. That rent is distributed regularly to the partners. Then, after a fixed period of time, the buildings are sold or refinanced. In either case, the equity in the building is divided among the partners. In the case of refinancing, the partners continue to own the building and the process is repeated, with the partners sharing the rent revenues and divvying up the built-up equity when the property is again refinanced.

With the Pemberton building, the partnership plans to sell the building in five years, unless 75 per cent of the partners vote to keep it.

So the partners will earn in three ways, Pincus said — from the cash flow from the leased building, from the paydown of the mortgage, and from the appreciation of the property.

The companies putting together the deals, like Accolade and Pratten Financial, make most of their money by taking a 10- or 20-per-cent share of the profits, measured as increased rental revenue and increased property value. By profit-sharing, the interests of the company and the investors are the same.

“It’s important that we have this profit participation because it let’s you know that we’re . . . going to manage this investment for the next five years in the most efficient and profitable manner possible so we too can earn some money,” Pincus said.

Is the hot market essential for the syndicate to make money? Not really, says Adam Gant of League Assets Corp., another relative newcomer to real estate syndication.

“If we buy a property for $3 million and it’s giving us $300,000 in income, what do we care if the market now only thinks it’s worth $2.7 million,” Gant said. “It’s still giving us $300,000 in income.”

The biggest risk is if the rental market changes, so that rental revenues drop, Gant said.

Adrian Mastracci, investment counsel with KCM Wealth Management, points out that investing in a real estate limited partnership isn’t for everyone. The investment is often illiquid and can’t be sold if circumstances change, he said. And some investors may not like being at the mercy of the other investors who decide by vote whether to keep or sell a project.

An average investor may also not have the real estate expertise necessary to evaluate whether a building’s projected earnings are reasonable, Mastracci said.

“A lot of people who invest in these kinds of thinks don’t really understand everything they are getting involved in,” Mastracci said. “But they’ve just got to do their homework. And if they don’t know, they have to find someone that does.”

© The Vancouver Sun 2006

 

Price gains in Calgary and Vancouver are unsustainable over the long term, TD

Eric Beauchesne
Sun

The Vancouver housing market is vulnerable to “significant moderation” because recent price increases are not sustainable, according to the co-author of TD Bank’s latest national housing market report.

“The recent dramatic price gains in Calgary and Vancouver are unsustainable over the long term, and both cities are vulnerable to significant moderation,” bank deputy chief economist Craig Alexander said Thursday.

The report noted it remains a seller’s market in Vancouver, even though the demand for housing has softened this year, with sales flat or negative in six of the past seven months. It said the price of an average resale house in Greater Vancouver has passed the $500,000 mark, and home ownership costs have climbed to about 50 per cent of household income.

“The recent trend towards weaker unit sales and rising listings is a positive development that might augur for a soft landing if it continues,” the report said. “Close monitoring of this market is clearly called for.”

CMHC senior market analyst Cameron Muir said the report’s message echoes what he has been saying — that recent house-price increases and mortgage-rate hikes have combined to reduce affordability, which has dampened sales.

“It would not be a surprise to see house prices fall by a few percentage points a year for a number of years until incomes and affordability grow to pick up demand,” he said in an interview. “But we won’t see a situation like 1982, when prices fell by 40 per cent, because we don’t have the super-high inflation and 20-per-cent mortgages they had back then.”

The bank report said housing prices in most parts of Canada never reached the “bubble” stage that they did in U.S. cities, and as such should not go from boom to bust as is happening there.

Canadian housing markets have been booming in recent years with extremely high starts, sales and price gains in many markets, but have generally lacked the degree of speculation that dominated past boom-bust cycles, it said. And the excesses here have been far less than those in the U.S.

“The other major Canadian real estate markets appear to be in much more balanced shape and housing activity in Central and Atlantic Canada has already cooled without prompting a price correction — supporting the view that a bubble never formed in these regions.”

The analysis was released as the Canadian real estate industry was confirming earlier reports of a widespread slowdown in home sales in July, led by declines in B.C., Alberta, and Ontario.

National home sales fell 3.1 per cent in July to 39,319, the Canadian Real Estate Association said. Sales fell in all provinces other than Nova Scotia and Prince Edward Island.

But, it added that the Canadian housing markets were merely returning to more balanced conditions thanks to an increase in homes for sale, which has left the housing market more balanced than it has been in 15 years.

Still, the average price of a Canadian home sold in July was $277,189, 10.6 per cent higher than a year earlier, at record highs for any month in Quebec and Newfoundland, and at record highs for July in all provinces.

While price increases moderated in July, it was the seventh straight month that the average price has been more than 10 per cent higher than a year earlier and all western provinces other than Saskatchewan posted double-digit gains. Alberta led the pack, with prices up 32.5 per cent.

“Prices are expected to continue to rise at a more normal pace over the rest of the year,” said real estate association chief economist Gregory Klump, adding that demand for homes remains strong and that the slowdown in the U.S. economy will also help keep interest rates here steady or possibly even lead to lower rates, which is good for housing.

Most analysts agree that interest rates here will not be rising further, a view that was reinforced by news Thursday of weaker-than-expected growth in the Canadian economy during the spring quarter.

The TD Bank noted in its analysis that the housing markets in Victoria, Vancouver, Toronto, and Ottawa were cooling or had already cooled, and were also becoming more balanced in most other cities, other than Calgary and possibly Edmonton.

“Although the Calgary housing market has begun to open up with a substantial increase in new listings in June and July, it remains a seller’s market, particularly for new homes,” it said.

“Given that the market is overheated at the moment, a bubble may be forming, or could easily develop, but the hope is that the trend towards a more balanced market continues.”

Ditto, for Edmonton, it said.

“The strength in the real estate market is supported by economic fundamentals, but prices cannot continue to go up at their recent rate indefinitely,” it said. “If the pace doesn’t soften, a bubble could form.”

© The Vancouver Sun 2006

Housing: But local experts take issue with bank’s conclusions

Ashley Ford
Province

Vancouver economic analysts aren’t banking on suggestions from the Toronto-Dominion Bank that the city’s vibrant housing market is vulnerable to a sharp price moderation.

David Baxter, executive director of the Vancouver-based Urban Future Institute, doesn’t buy one bit of the TD report released yesterday.

“There is no bubble,” he said. “This housing market is simply not going to collapse and neither will we see any sharp price drops in the immediate future. I certainly see no meltdown at all; however, we are not going to see the huge price gains we have seen in the recent past either,” Baxter said.

“When you look at the overall picture, the B.C. economy is strong, household incomes have increased, interest rates are stable, the housing market is very steady and there is little speculation in it,” he said.

“My only real concern is that the Chinese economy maintains the ability to turn out the manufactured products the rest of the world wants. That is what drives our economy to a large extent,” he said.

The TD report by economists Craig Alexander and Steve Chan said that “recent dramatic price gains in Vancouver and Calgary are unsustainable and that these urban centres are vulnerable to significant moderation, including the possibility of a pullback in prices at some point in the future.”

Alexander and Chan say the housing market has been particularly explosive in Calgary and Vancouver, driven by the oil boom in Western Canada. Consequently, these cities are most likely to see a drop in prices.

The pair say demand for housing in Vancouver has been softening since the beginning of the year and that price appreciation has plateaued, but has done so at an extremely elevated pace of 20 per cent, year over year.

“In six of the last seven months, units sales have been virtually flat or negative on a year-over-year basis. This suggests that while it is still a seller’s market, the balance between supply and demand has improved,” they added.

David Hobden, an economist at the Central Credit Union, also dismissed the TD report.

“I simply don’t agree with their speculation about Vancouver,” he said.

“They appear to be basing their premise on the belief there will be some shock to the Western Canadian economy such as sharply rising interest rates or a major drop in oil price,” he said.

“That is simply not in our forecast horizon. So it is hard to imagine a shock that will make that happen,” he said.

He agreed with Baxter that the period of sharply rising house prices is over.

“Price inflation has peaked for this cycle, but we are not going to see a price fall off overnight,” Hobden said. “It will take some time and eventually increases could fall to the one to two per cent level.” He expects that to occur by 2008 at the earliest.

© The Vancouver Province 2006