IT’S’NAIVE’ TO BLAST THE BIG INSTITUTIONS THAT PROVIDE RENTAL HOUSING, SAY DEVELOPERS

In the House of Commons last year, Vancouver East NDP MP Jenny Kwan lambasted the powerful “profiteers” that “financialize” rental housing.

“Real estate investment trusts enjoy preferential tax treatment, and the seven largest REITs alone have saved a combined $1.5 billion through federal tax loopholes,” Kwan said in a private member’s bill.

Kwan’s broadside against those she believes take advantage of the crisis of Canadian housing unaffordability was also aimed at the scores of federal cabinet minister and MPs who profit through their various private investments in real estate.

But readers likely won’t be surprised to hear that the property development industry, and many politicians, don’t have trouble with REITs. Or with the insurance companies and pension funds that often finance and manage much of the country’s purpose-built rental housing.

“Saying that REITs financialize housing is naïve. It’s also unfortunately political,” said Robert Moore of Dexter Realty.

In most cases, Moore said, the eventual owners and operators of most of the hundreds of new rental towers being proposed for Metro Vancouver — including within the drastically upzoned Broadway corridor and around SkyTrain stations — will indeed be REITs, pension funds, insurance companies and other well-capitalized financial institutions.

“And that’s a good thing. It means stability and balance, something housing markets need. Canadians are invested in many of these organizations through their RSPs and mutual funds,” Moore said.

Like it or not, it’s just the way things actually get built in our mixed economy.

Indeed, although Moore didn’t mention it, Quadreal Property Group, the fast-growing real estate arm of the B.C. government’s public pension fund, is heavily involved in financing rental towers.

They include the mammoth Oakridge Park housing and rental project, which includes a small proportion of below-market units. Quadreal’s assets are worth $85 billion.

Such corporate ownership scenarios are increasingly the way forward, since the once-popular investment strategy known as pre-sales — in which individuals buy condo units before they’re built with the aim of eventually renting them out — has in the past couple of years lost its appeal.

A positive thing about REITs and pension funds owning large rental blocks, said Moore, is they “take a long-term view. Vancouver has proven a resilient, low-risk market in which conservative investors can secure and hold assets for the long term.”

Moore maintained the REITs, insurance companies and pension funds involved in purpose-built rentals are “not about raising rents. They are dutiful professional landlords. They take care of common areas and components like boilers, elevators and roofs.”

As a case in point, he cited the decades-old residential towers in the West End of Vancouver, saying they are mostly run by large institutions and generally offer affordable rents and well-maintained buildings.

UBC business professor Thomas Davidoff tends to agree, in part because it has become increasingly unwise for individual investors to dive into what was the condo craze.

While Davidoff knows REITs, pension funds and hedge funds “get beaten up in popular discourse,” he maintains they offer individuals a prudent “opportunity to invest in a diversified pool of apartments.”

Still, it’s not as if investing in rental towers is a walk in the financial park. Many things can mess up profit margins.

Vancouver developer John D’Eathe, for instance, says one down side for owners of rental apartment blocks is that the B.C. government, like many across Canada, restricts when and how much tenants can be charged. The B.C. government currently sets annual rent increases at 3.5 per cent per year.

And given the high cost of land in Metro Vancouver, especially within the upzoned boundaries of the Broadway plan and SkyTrain stations, community planner Michael Geller said he is “not so certain about the depth of demand for apartments renting for $4,000, $5,000 and $6,000 per month. That’s the necessary rent to make many of these new buildings financially affordable.”

Given the astronomical stakes, Moore said developers “above all must be excellent risk managers. Risk comes from all directions — political risk, financing risk, construction cost risk, rezoning risk and many risks beyond their control. Any mistake can cost the developer their profit.”

Using a complex financial formula known as a “proforma,” rental developers calculate how much interest they can afford to pay on land, construction, taxes and fees so that institutional operators will eventually be able to charge tenants, in most cases, less than $6 per square foot per month.

REITs receive special tax treatment in Canada. And the Canada Housing and Development Corp (CMHC), a Crown corporation, offers lower rates to rental developers if a portion of units are to be below market. But, Moore said, some developers still prefer to go to private lenders.

In regard to the gargantuan Broadway plan, which covers 500 square blocks between Clark Drive and Vine Street, 1st and 16th Avenues, Moore said developers face the cost of being responsible for tenants who lose their homes, which is leading to the “prioritization of projects which displace the fewest tenants.”

While some residents, he said, “long for the 1980s — and don’t we all miss the easy traffic commutes — those days are gone. Vancouver is planning for the 2050s and, yes, the city will look different.”