CKNW - Why Developers are Going into Receivership.
This week, news broke that a major Surrey developer Thind Properties https://thind.ca/ was put into receivership by its lender Kingsett. At first there was just one project in Surrey with 90% of the units already presold. This seemed quite odd, since presales are often the key to getting a project's construction underway. But in this case, the presales occurred some time ago and the Building Permit had not yet been issued.
Then we learned that there were two other major projects in Richmond and Burnaby by the same developer also in trouble. In total, the lender was owed over $300 million. And then it was reported that the developer had misappropriated funds and failed to pay money owed to the government.
Both Paul Sullivan, https://ryan.com/about-ryan/leadership/paul-sullivan/ generally regarded as one of the most knowledgeable appraisers and real estate consultants in town and I were invited by CKNW to comment on the receivership and why it might have happened. Paul spoke to Mike Smythe. A day earlier, I had spoken to Jas Johal. Neither of us knew the other was doing the interviews but if you can take the time to listen, you'll hear us saying essentially the same things.
Paul Sullivan on Mike Smyth Show CKNW https://open.spotify.com/
MG on the Jas Johal Show. https://www.iheart.com/
In case you don't have time to listen, here are some key takeaways.
The presale markets have dried up. In order to arrange project financing lenders want to know whether there is a market for a project. When I first started in this business, good lenders undertook research to assess whether a market existed, the prices the units would sell for upon completion, and then make a decision whether to lend on the project or not, and if so, what percentage loan would be acceptable.
That's not how we do it today. Instead, in most cases, developers are required to set up presale programs, usually in a purpose-built presentation centre, with models mock-ups of a kitchen and bathroom, and sometimes a full suite or two. Virtual reality displays show the views from each suite and related marketing information. The cost of all this is usually six figures and often seven.
Until the last couple of years, most presale buyers were investors intending to rent out the completed unit, or younger households willing to purchase three or more years before the project was completed. Families with children or empty nesters were generally not major market segments. Although certain projects in established neighbourhoods like Kerrisdale, Dunbar, West Vancouver were designed and sold to empty nesters, who could plan a move three years later.
New tax programs are major culprits. Unfortunately, government taxation programs have completely changed the presale marketing of projects. The Foreign Buyer Tax, and subsequently the ban on foreign buyers removed them from the market. Then the Speculation and Vacancy Tax and Empty Home Tax discouraged those wanting to purchase a condominium as a second home. To add insult to injury, the prohibition on short-term rentals further exacerbated the situation.
While many applaud the governments for introducing these taxes, they haven't thought about a significant, unintended consequence. A lot of projects are simply not able to meet their presale target and get underway. Others are not even trying. If you need proof, just look at how many projects have been approved in recent years along the Cambie Corridor that have not proceeded. It is also estimated that there are 44,000 units in Surrey that are in the approval process, or already approved, that are unlikely to proceed.
On top of all of this, as Jas Johal pointed out, there are a substantial number of completed and unsold condominiums. Furthermore, there are many units, especially high-end luxury units that sold a couple of years ago at very high prices, oftentimes in excess of $3,000 psf, that are nearing completion. Units in these buildings are now being offered for sale as assignments, oftentimes well below the original price paid.
Travelodge Receivership. When I spoke with Jas Johal, he referenced Coromandel's high profile receivership that we had discussed last year. He wondered whether the Thind receivership was likely the last one we would see for a while, or just the beginning. Unfortunately, I thought it was just the beginning adding that earlier this year, theTravelodge Motel redevelopment in North Vancouver being undertaken by Marvel Group, for which I had been the Development Manager for three years, was put into receivership by its lender Atrium MIC.
Although I had obtained the rezoning that created the value, and oversaw the Development Permit Application, at the time of the receivership, I was owed a substantial amount of money. Whether I get any of it back remains to be seen.
There will be more Receiverships. Sadly, I expect more receiverships in the year ahead. In addition to detriorating market conditions, project costs have increased considerably.since projects were first conceived and received preliminary approvals. Three key increases are construction costs, interest rates, and municipal fees. Looking at two projects I'm involved with along Cambie Street, construction costs are substantialy higher than five years ago. Although prime rates interest rates are coming down, developers are often paying substantially higher interest rates. In the case of Thind, their loans were at 10% and 12%. While some people may be pleased to read about developers going broke, sadly a lot of small people get hurt too.
Municipal fees and timing are serious concerns. Both Paul Sullivan and I pointed out that unfortunately the higher municipal Community Amenity Contributions and Development Cost Levies that were approved when times were good are seriously impeding new developments from proceeding. In the case of the Cambie street projects, the municipal fees, including engineering requirements total $9 million, for a 61-unit project. This is 90% higher than for a similar project completed across the street a year ago. Furthermore, while we constantly hear project approvals are being sped up, and in some instances they are, they still take much too long. It often takes months to get an answer from staff on what fees might be payable.
To conclude, as more high profile projects go into receivership, lenders become increasingly cautious. As a result, it is likely that many more projects with prior approvals and obligations to pay substantial fees payable to the city, are not going to proceed. The market simply is not there right now.
Crying Wolf. Developers have often complained in the past about the difficulties making projects work financially. But this time they are not crying wolf. Sadly, the unintended consequences of projects not proceeding will be serious. A lot fewer people will be working, and as I and others have written, the affordable housing crisis is not just about the cost of housing. It is also about BC's low incomes. Canceled projects will not help.