Monthly Newsletter: February 2006

I’d like to start this month by thanking all of our clients and friends who came to see us at the 2006 Financial Forum. I’d all also like to welcome all the new folks that we met at the show that will be reading our monthly newsletter for the first time. This year’s show was a resounding success and we were happy to be a part of it. Despite all the chatter about income trusts, investment syndicates and precious metals, real estate was a still a hot topic with all the attendees. We had the pleasure of doing six seminars over the four days and all but one were standing room only. I talked about strategies for achieving success in Toronto’s income property market (all this information is available for you to read at www.plex.ca) and was at amazed at how many folks still have an active interest in this market.

I’d also like to thank Mortgage Marcus and Paul Schuster (fire retrofit expert) for their participation with us at the show. Marcus did several excellent presentations on mortgage mathematics and had plenty of interest in his tax-saving and debt restructuring programs. He talked in detail about the “Smith Manoeuvre” – where you top up the mortgage on your principal residence (provided that it’s a single family home) and use the extra funds to purchase investments (of any sort) where you can fully deduct the interest payments. It’s a very interesting proposition and worth educating yourself on. If you are interested in finding out more or would like to get a free copy of the actual book, please feel free to contact Marcus at marcus@mortgagemarcus.com.

The income property market in Toronto has started off this year with a bang. From everything that I have seen over the past three weeks, 2006 is looking a lot like last year – high prices, multiple offers and a lot of overall action. There’s no doubt in my mind that the market still favours sellers but there are still quality income properties out there if you look hard enough.

Interest rates went up 25 basis points last week and most believe that we can still expect increases upwards of a point (or slightly more) this year, but I still don’t think that this will stall the market. I also still believe that if the market cools down, the prices that we have seen over the past couple of years will still hold. I do not anticipate a reduction in the prices of plexes in prime locations

One in six Canadian homeowners and investors who responded to a recent study said they planned on investing in property in the next two years. The study, commissioned by Re/Max, found that single-home purchases were the most popular investment, followed by multi-unit buildings, condominiums and townhouses. Of those who planned to invest in real estate, close to 30 per cent already owned a home and 43 per cent were under age 40. Michael Polzler, executive vice-president of Re/Max Ontario – Atlantic Canada Inc., said Canadians are by nature conservative investors and like the predictable returns real estate offers, even if they might bet a better bang for their buck in equity investments. “It has an allure,” Polzler said. “You can write off your expenses and you know what you have.”

Carl Gomez, an economist with Toronto-Dominion Bank, offers an opposite view. He states there has been a “big rush to real estate” in recent years, thanks to rising prices, low interest rates and poor returns in equity markets, but he is not convinced that trend will hold now that interest rates are on the rise and equity markets are delivering strong returns. “People go where the returns are,” he said. “The tide might be turning.” If the tide does in fact start to turn, I’m sure that we on the investment side of the Toronto market will see the signs well in advance.

One topic that came up a few times over the course of the Financial Forum was the continued belief that Toronto is undergoing a vacancy problem. In my opinion, this is an exaggerated concern spurred on by the media. Folks think that there are loads of empty apartments out there, thus making investment properties an unsure bet. This is simply not the case – at least, not in the core of the city. There was an article in a Toronto daily last week about an investor who bought a triplex and was having a tricky time tenanting the last suite. Well, she was our client. We bought the building with her and she is now looking for another property. And yes, her empty suite mentioned in the paper did get rented for what she wanted.

The vacancy rate for new condos is under 1%. I would argue that the rate in the Central core for income properties with less than six units is under 2%. I had a friend call me the other day looking to rent a two bedroom and wanted to spend around $1400 a month. I couldn’t find anything on MLS or on www.viewit.ca so I called a few clients who I knew had multi-unit buildings. No one had any vacant units. When I show income properties to clients we do see vacant suites. In many cases though, the owner chooses not to rent, in case the buyer would like that suite. It’s also awkward to tell a new tenant that the building is for sale – it sometimes makes the renters feel nervous.

“I see a downward push on vacancy rates in 2006 and 2007, though there will be some resistance as new condos come on stream,” Ted Tsiakopolous, Ontario regional economist for the Canada Mortgage and Housing Corp. says. “The volume of incentives has softened a bit and landlords are pulling some of them off the able, such as free rent, free parking, or renovations. This is good news for real estate investors.”

Average rents in Toronto were flat between 2004 and 2005 and virtually unchanged since 2002, says a report by Clayton Research Associates Ltd. Aggressive recruiting of tenants helped fill vacant units. Better times are ahead for landlords, because of continuing strong immigration and a widening gap between renting and owning. “Overall vacancy rates will decline over the medium term,” the report concludes, “thereby allowing landlords to pass rent increases through more easily in the future.”

Even commercial space is starting to rent at a premium. For the first time this decade, rents for premier office space in leading markets world wide increased simultaneously, new data show. And here in the GTA, office demand is tipping the balance of bargaining power to landlords. Commercial real estate services company CB Richard Ellis says a strong economy and low unemployment pushed the vacancy rate in the downtown core to 6.3 per cent, down from 8.4 percent in 2004. Take a look at the following chart that shows how Toronto commercial vacancy rates compares to other major cities:

Market

2005 rent

(sq. ft.,

U.S. dollars)

% change

from 2004

Vacancy

Rate

Hong Kong

$58.81

45.0%

4.8%

London

$141.72

6.7%

7.0%

Los Angeles

$29.76

15.3%

13.1%

Madrid

$36.59

8.0%

9.0%

New York

$44.85

11.8%

7.0%

Paris

$72.06

2.1%

5.0%

Sydney

$40.68

3.2%

10.4%

Tokyo

$111.45

19.8%

1.7%

Toronto

$25.44

3.9%

6.3%

Washington

$45.47

4.5%

6.4%

It is interesting to see how competitive we still are on a square foot basis. At Plex Realty, we still show many mixed-use buildings to our clients. It’s encouraging that rents for both residential apartments and storefronts are starting to creep back up.

Before I sign off this month, we elected a Conservative Prime Minister last week. What does this mean for our economic future and the overall Toronto residential investment market? I think I’ll leave those thoughts for David and Greg. J

Next month we’ll be in the midst of the Spring market so I look forward to sending you more news from the field.

Paul Anand

Broker

www.plex.ca

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