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Developers are washing up on the rocks


Blog by Shaun Kimmins | October 24th, 2008


Excerpts from an article I receive today regarding the Real Estate Slowdown. Project Developers are starting to bear the brunt of the slowdown 

Robert Quigg's $850-million Capella four-tower luxury condominium project at Bear Mountain near Victoria is on hold, becoming Langford's second development casualty in recent weeks. Quigg said pre-purchases virtually ground to a halt at the end of August. "We are not doing anything on Bear Mountain right now," Quigg said. The shutdown came barely a month after work began on the first tower. Capella is planned for four towers, from 26 to 44-stories, on 20 acres overlooking Greater Victoria. Quigg estimates Capella is on hold anywhere from six months to two years. Clients will get their deposits back and have the first choice at units when the project restarts, he said. Westhills development in Langford, planned as a 6,000-unit "green" neighbourhood pilot project, suspended work in early October. It also cited the recent catastrophic downturn in world financi
 
Lucaya Project Stopped In Kelowna

 

Construction of Lucaya, a 21-storey residential tower on Sunset Drive in Kelowna , has been stopped. Mark Dedominicis of Navigator Development Corporation, the Calgary-based development manager for the building's investors, said construction had been slowing down for some time before the complete stoppage came to be. "Until we have committed financing we are going to take the site down to make sure it's safe and expend as little capital as possible," he said adding they're looking for financing "that's not going to impede the profitability" of the project. About one-third of the project sold in the pre-sale phase.

 
Shut Down Infinity Seeks Fresh Financing

 

A major refinancing effort from PriceWaterhouseCoopers and the law firm of Fasken Martineau DuMoulin LLP is trying to revitalize the $350 million, 1,400-condo unit Infinity at Central City project in central Surrey . Robert Millar, a partner at Faskens, representing South Korea-based Jung Developments Inc. said the company applied for financial protection under the Companies Creditors Arrangement Act and was granted interim relief from its creditors. Jung is attempting to build a five-tower complex, residential/retail complex, the largest in Surrey history. Miller told the 560 pre-sale buyers that their deposits are safe and that "we are confident we will arrive at new financial partnership that will ensure this project is completed."

 

Millar said the first of the five 36-storey towers has been completed and occupied. Two further towers are under construction, concrete floors have been poured up to levels 21 and 25. The final two towers have not come to market but have zoning approval in place. It is estimated that approximately $100 million is needed to finish the project.

 
Others

 

We also hear of Intrawest being in trouble (Whistler may well be in bankruptcy this Friday - but will operate as a resort) and the Ritz on Georgia has stopped construction. Financing is cited as the problem for Intrawest, parking lot troubles (???) for the Ritz on Georgia (Ahem?! The sales office is closed and advertising is painted over). We also hear through the grapevine the rumour that work has been halted at the Millennium project "Evelyn" in West Vancouver as well. (Question now on Athlete's village?) Add to a glut of quarter share and Phase II condos clogging the Whistler marketplace ... and being fearful is understandable.

 

Major Point: There will be more. Buyers will continue to back off, the bad news will accelerate. It is normal at the end of the cycle. From 1995 to 1999 condos on the Concord Pacific site dropped by 35%. Condo prices in the Bosa Bros. development on

Quebec St.

sold on average $46,000 lower on each sale than the original price achieved by Bosa. You overbuild - you have to clear out inventory ... and new projects will not be built. Every project that goes down is GOOD for the remaining used and new units on the market. However, look at this as an opportunity. Bide your time ... keep watching for bank ordered deals (bank says: "You MUST sell 6 units or we pull financing" ... developer will have to blow them out). Buy only the deal of a lifetime ... but keep looking.

 
Watch For The Rise Of The Sale-And-Lease Back

 

Commercial lending is tightening up - and fast - despite what appears to be a fairly robust commercial real estate market in Western Canada . Some large projects, both commercial and residential are being stopped or stalled (see below for the latest) as nervous lenders pull financing. At the same time, businesses are having problems securing financing for expansion. For these reasons, we can expect to see more sale-and-lease back arrangements, even in Metro Vancouver. John Lecky, a principal with Avison Young (Canada) Inc. in Vancouver (604-687-7331) explains the concept can offer advantages to both sellers and buyers. The advantage for the vendors is that they acquire immediate cash based on 100% of the property value, without the need to acquire financing; the removal of real estate debt from the balance sheet; and continued control of the property without responsibility of pr

 

There are also advantages for the buyer. The buyer acquires a fully-leased asset with the potential for appreciation in value. Most important, the return on investment from the rental revenue can be leveraged by obtaining debt that is lower priced than the cap rate, which increases the rate of return. Recently, Canadian Tire sold and leased back 12 of their stores, showing that the strategy is moving from the office and industrial sector into retail. Canadian Tire pocketed $170 million from the sale, mostly to a REIT, and signed 15-year leases as the tenant. Locally, Pacific Blue Cross recently sold and leased back its Burnaby headquarters; and Ritchie Bros. Auctioneers sold and leased back its Surrey headquarters.

 
Canada-Wide Sales Down 10% In Third Quarter

 

Fewer homes were sold in the third quarter but the number put on the market also dropped - a sign that a slide in housing prices is beginning to slow, says the Canadian Real Estate Association. A total of 76,391 homes were sold in major Canadian markets in the quarter, a 10.7% drop from the same period last year, CREA said Wednesday. Vancouver led the way with a 43.2% decline in home sales year-over-year while Victoria posted a drop of 16.6%. New listings declined to 146,637 nationally, a drop of 3.3% from their peak in the second quarter of 2008. Listings are still up 6.5% year-over-year. Nationally, average home prices fell 4.9% year-over-year to $319,969. The decline was led by Vancouver, where a decline of 8% more than offset increases in Saskatchewan . Regina posted an increase of 27% while Saskatoon home prices added 23%. Canadian homeowne

 

Major point: Yes, we are different and yes we will come out of this, but not now. Sell Regina and Saskatoon . Markets will turn negative there as well. Edmonton will also get affected now because of the oil price collapse. A number of tar sand projects need $100 oil and will be put on hold.

 
We Say It Again And Again...

 

Markets become the stories people hear/tell/retell about them. The news is full of worldwide bank bailouts, guarantees, joint lowering of rates ... trouble ... trouble. "Ozzie, this morning I heard that 1 house in 90 is now in foreclosure in the US . OH MY GOD! The world is collapsing..." Eh, so what? 89% of houses in the US are NOT in foreclosure. "But, Ozzie 3.8% of all mortgages are in default. OH, MY GOD!" Eh, so what ... 96.2% of all US homes are NOT in default. "But Ozzie I bought in the US too early and it is going down more. OH, MY GOD!" Eh, what? ... If you paid $140,000 for a condo 2 months in June (when right here we TOLD YOU to change your money into US dollars), that condo now would cost another Canadian $171,000 (because of the exchange rate). "Yeah, but Ozzie, Iceland is collapsing. OH MY GOD, Britain too!" Eh, so what...? We are in Canada , we are in BC, whe

 

I keep saying that we are printing money ... that inflation is primarily a monetary phenomenon (Friedman) and that we will eventually see higher asset prices again. But each time we have to clear excesses first. Too many condos built (like from 1979-1982 and from 1990-1995) have to be sold at lower prices, some developments have to collapse, some people will be foreclosed on, and others will go bankrupt ... but - in the end - we will muddle through again. New York collapsed by 35% to 40% in value in the early '90s - the news was dire... The Reichmann's went in and bought real estate and made $500 million in 9 months. San Diego was down by 35% in 1992 and since then has risen by 410%. Of course, it had to readjust! Booms are followed by busts ... but not necessarily over the cliff. I advised last January that in 2008 cash would be king. Will we have bad times? YES. Unfortunately - again - markets are the stories

 

Major Point:

 

Fear always is stronger than euphoria. And you can SMELL the fear in every news report, in our papers and our talking heads on TV. While we have a propensity to overshoot our upward cycles driving prices higher than we ought to, we also - alas - have the propensity to drive prices lower than we ought to when markets turn as now. (We expect prices to reverse between 5% and 20%, depending on area and product.) The losses in the stock market, the crash in oil, gas prices and the ongoing barrage of talking about (even just the talk) the recession and job losses, may well overshadow the real bright future outlook we should have in BC. This will last 1-3 years (we have talked many times of previous downturns and price declines). It is not just a worldwide issue. We have overshot our targets on affordability in Vancouver (70-plus percent), we have a sharp reversal in sales and a substantial increase in listings.

 

Understand your motives ... you are not buying the market, or the world, or Iceland ... you are buying a home, a condo, a place of business. Real estate has a use and thus will always have a value. Best of all, if it never goes up ... eventually you will have it paid off and you own it. Keep your eyes open. In the next 1-3 years some great opportunity will come your way. Risks rises in direct proportion to how fast and how high values go ... risks falls in direct proportion in downturns as well.

What should you do if you are thinking of selling?

If you are considering selling your condo, do yourself a favour and call me. Everybody has a different situation and my primary goal is to help each of you determine how best to maximize your investment. Let's talk about your individual scenario so you have all the information you need to make an informed decision.

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