Calgary condos undervalued

Matt Crowley

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#1
I've been walking around making a distinctive market call but began exploring this with a previous post: Is the sum greater than the parts?, and I'm now going to take an actual stance on it: I believe that Calgary condos are currently undervalued.

- 15-20% discount in purchasing standalone condos vs. consolidated investment product. This is a macro flip, 15 years ago, you could buy investment product at a cheaper per-unit rate than individual condos
- CMHC rules are going to substantially change: CMHC is willing to make an equity investment in properties which effectively extends the amortization from 25 to 30 years + increases RRSP first time home buyers contribution from $25k to $35k. I think this has some very positive implications for the housing market.
- there is blood in the water in Calgary and I see very few chutes of green. Downtown probably has 40% vacancy once you consider shadow vacancy, sublet, and companies with vacant floors.
- Calgary is a significant cyclical low when it comes to rental housing. In the early 1990’s there were 55,000 units, and this stock has been drawn down by 15,893 units (-27.6%) from its peak in 1994 though condo conversions. This is a surprising result given that Calgary’s population has increased by 77% since the mid-1990s

Interested in your thoughts...
Time frame matters, yes. But if you can cover your condo fees in a B product, I'm saying you are getting in at a great floor right now. I think Canada is pretty anemic economically and don't see a rise in interest rates any time soon. More likely, I would believe a rate cut if we keep tracking the way we are right now.
 

kfort

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#2
Interesting thoughts. I try and put it in perspective from the SK market I’m in and it’s similar but not quite the same. Saskatoon has approved and overbuilt so many condos of all kinds that combining that with the conversions from ~2007 and there isn’t really much for replacement multi family stock overall. So while you can absolutely buy condos far cheaper than multi doors currently, I can’t say the same (undervalued) simply because the light at the end of the tunnel isn’t even in sight yet. It’ll be years until the glut is worked through.

I do believe there is opportunity in Saskatoon for reversions. Especially in a few of the smaller buildings where currently there is 50%+ of unit factors for sale... I looked at this outside of Saskatoon a couple years ago when I found a building with 52% unit factors listed but walked when I saw the cinderblock construction.

So I suppose my take on the Saskatoon market is... not undervalued (yet), likely going lower, if I had the patience and pockets for it likely opportunity to revert & profit.


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CorySperle

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#3
Why condos at all? I remain convinced that all condos, older walk ups and new builds are bad income generating properties. Many folks bought these 'cheap' converted condos in Edmonton in 2008 when the market cratered, and even today heavily regret it. My own PM in saskatoon is boasting at how 'cheap' condos are and is loading up on them.

My two cents, cheap = crap. A much better Calgary play would be to buy multiple SF units and sell them off to owners a few years from now.. Commercial assets are even better and a decent apartment block is still a much better investment than a substantially discounted condo.
 

kfort

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#4
Would you ever buy a controlling interest and revert a small condo bld to a multi in either market Cory? I’m talking something like the 9 unit buildings over by Avalon mall.


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ThomasBeyer

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#5
Would you ever buy a controlling interest and revert a small condo bld to a multi in either market Cory? I’m talking something like the 9 unit buildings over by Avalon mall.


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No. Too small. Too work intensive. Tough to finance. Buy the whole building. Or a REIT.
 

kfort

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#6
At what scale approximately would you consider it worth the time Thomas? At what expected roi/ value bump?


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ThomasBeyer

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#7
At what scale approximately would you consider it worth the time Thomas? At what expected roi/ value bump?


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What’s your time worth per h?
How far from where you live?
How hostile or friendly is the co-ownership group ?
Court action required ?
How much capital will be tied up for how long ?
What’s the expected ROI on cash MINUS your time invested ?
What’s the mortgage situation?
What’s the vacancy rate?
What’s the demand ?
What’s the rent?
How high is the reserve fund ?

Then (and only then) could I answer this !
 
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CorySperle

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#8
Would you ever buy a controlling interest and revert a small condo bld to a multi in either market Cory? I’m talking something like the 9 unit buildings over by Avalon mall.


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I would consider something like this, however the units would have to be substantially discounted. Hard to believe how fast the pendulum has switched in the opposite direction, and seemingly you can get burned converting a building to condos, and possibly even more so the other way around. The best and simplest method is to simply purchase a value add building in a strong market.
 

Matt Crowley

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#9
@CorySperle my comment is more from the perspective of a younger investor looking for an entry point into the market. There is really no difference between an investment building and a single condo on a B-class property, except the units are about 15-20% cheaper as an individual purchase than the whole building right now. If you are a buyer at a 20% higher price tag, why wouldn't you be at a 20% lower price tag? I don't believe the argument that condo corps are all run that inefficiently when it is just single owners. You are limited in bringing up the building as a whole to a higher standard, but some buildings have overall brought themselves up already. And there are condo conversions that were creamed in 2014.
 

ThomasBeyer

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#10
@CorySperle my comment is more from the perspective of a younger investor looking for an entry point into the market. There is really no difference between an investment building and a single condo on a B-class property, except the units are about 15-20% cheaper as an individual purchase than the whole building right now. If you are a buyer at a 20% higher price tag, why wouldn't you be at a 20% lower price tag? I don't believe the argument that condo corps are all run that inefficiently when it is just single owners. You are limited in bringing up the building as a whole to a higher standard, but some buildings have overall brought themselves up already. And there are condo conversions that were creamed in 2014.
True but time is money.

As such the time invested to right the ship needs to be considered.

When you’re buying an apartment building at a 4.5-6% cap rate you’re buying a turn key business with little time (and relatively little money ie 20-30% of asset value) invested and that’s why it’s more expensive.

If you buy an under managed condo complex where there may be court action required to re-convert to a single title, combined with deferred maintenance, multiple squabbling owners AND mortgaging challenges they must trade at a discount. At some point the discount is high enough to make it a good investment but that is highly individual and needs a lot of knowledge and experience.

Not a strategy for new investors.


Thomas Beyer, Asset Manager, Investor, Author, Father, Mentor www.prestprop.com
 
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Matt Crowley

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#11
When you’re buying an apartment building at a 4.5-6% cap rate you’re buying a turn key business with little time (and relatively little money I’d 20-30% of asset value) invested and that’s why it’s more expensive.
That is not always true Thomas. It wasn't true 10-15 years ago and there has been a macro flip. 10-15 years ago you could buy a building at a price per unit less than comparable condos. This is why there were so many condo conversions. Today there are reversions, so I don't quite agree with your point here.

I think the fear is outsized. And you haven't factored in the possibility that the condo corp could actually be overfunded based on actual costs. This isn't rocket science. You can ask for reserve fund studies and often there are blatent errors on SF, amount requiring replacement, over-accelerated depreciation.

I think has become a sacred cow that there is some intrinsically better fundamental quality to a B or C building over a very similar (functionally identical) piece of real estate that is a condo. Not all condo boards are mismanaged, and frankly, everybody wants to pay less so why wouldn't a board listen to a smart alternative if you brought one forward as a single owner?

This isn't an opportunity to buy hundreds of units, but for a small investor right now. Calgary condos is starting to pencil.
 
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ThomasBeyer

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#12
When you’re buying an apartment building at a 4.5-6% cap rate you’re buying a turn key business with little time (and relatively little money I’d 20-30% of asset value) invested and that’s why it’s more expensive.
That is not always true Thomas. It wasn't true 10-15 years ago and there has been a macro flip. 10-15 years ago you could buy a building at a price per unit less than comparable condos. This is why there were so many condo conversions. Today there are reversions, so I don't quite agree with your point here.

I think the fear is outsized. And you haven't factored in the possibility that the condo corp could actually be overfunded based on actual costs. This isn't rocket science. You can ask for reserve fund studies and often there are blatent errors on SF, amount requiring replacement, over-accelerated depreciation.

I think has become a sacred cow that there is some intrinsically better fundamental quality to a B or C building over a very similar (functionally identical) piece of real estate that is a condo. Not all condo boards are mismanaged, and frankly, everybody wants to pay less so why wouldn't a board listen to a smart alternative if you brought one forward as a single owner?

This isn't an opportunity to buy hundreds of units, but for a small investor right now. Calgary condos is starting to pencil.
True in theory.

How many have you done so far ?

Of course if you can buy ALL condos there should be a low to no discount. I am referring mainly to a scenario where you buy less than all.


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com
 

bizaro86

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#13
I've been involved in a reversion in the metro calgary area. It really isn't that big a deal...

I owned 50% of the units (and exactly 50% of the unit factors) in a 8 unit condo corp. We sold the 4 units to another investor who owned 3, and he also bought out the final unit. Fired the condo management company and operates it as an apartment building. I'm not sure if they ever converted it from condo title to a single title again.

We made a very attractive return on both our time and money, especially given how short the hold period was.
 
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ThomasBeyer

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#14
I've been involved in a reversion in the metro calgary area. It really isn't that big a deal...

I owned 50% of the units (and exactly 50% of the unit factors) in a 8 unit condo corp. We sold the 4 units to another investor who owned 3, and he also bought out the final unit. Fired the condo management company and operates it as an apartment building. I'm not sure if they ever converted it from condo title to a single title again.

We made a very attractive return on both our time and money, especially given how short the hold period was.
True for 8 units. Not so easy with 21 units and 17 owners, some of which are banks and/or unmotivated sellers, or in buildings with 30% vacancies.


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com
 

bizaro86

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#15
Absolutely correct. It gets exponentially harder the larger the building is. Also depends how patient you are - I own a few units in a specific building that I really like. I'm currently on pace to own the whole thing in another 50-60 years...

It is worth noting I think that 12 condos in Calgary would be WAY cheaper than buying a comparable 12-plex. Disadvantage is more management intensive than one building, and operating costs are higher due to condo management layer.

Upside is that initial price is less, residential financing available, and it's easier to sell a portion of your portfolio.

We sold the majority of our condos a few years ago and started to buy back now late last year.
 

Matt Crowley

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#16
I completely agree with this thesis - the shift is going to happen soon where renters become homeowners again. Early stages now in Calgary, but interest rates are low, Millennials may care about "experiences" but getting a mortgage is so easy with even a few thousand dollars saved. This, plus CMHC equity financing + RRSP home buyers plan. Being a renter is not going to pencil for that much longer. I think a macro shift is coming....

https://www.mortgagebrokernews.ca/n...ers-might-become-home-owners-soon-256228.aspx
 

ThomasBeyer

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#17
I completely agree with this thesis - the shift is going to happen soon where renters become homeowners again. Early stages now in Calgary, but interest rates are low, Millennials may care about "experiences" but getting a mortgage is so easy with even a few thousand dollars saved. This, plus CMHC equity financing + RRSP home buyers plan. Being a renter is not going to pencil for that much longer. I think a macro shift is coming....

https://www.mortgagebrokernews.ca/n...ers-might-become-home-owners-soon-256228.aspx
It’s not so simple. Many prefer to be a renter as it is cheaper if you plan to move in the next 2-4 yrs esp in a flat market with little equity upside.

Others want to buy but have poor credit.

Yet others falter on the steep (rather anal and utterly unnecessary) B20 mortgage underwriting guidelines that underwrites you on 5.2% rather than the rate you’re paying eg 3.2%

Rates won’t come down much .. maybe 0.1-0.2%. Around 3%.

Unless in-migration picks up AND economy expect flattish to weak AB economy, rents and vacancies to continue until fall. Only if conservatives get a clear majority this fall in Ottawa will Alberta meaningfully improve.

With a possible Liberal minority gov propped up by NDP and vastly growing Greens it might yet get worse for Alberta in 2020 and beyond.


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com
 
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Matt Crowley

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#18
Well obviously....

Keep in mind that 80% of the new rentals being constructed have 30% of the units underwritten to achieve above $2000 rents. I have seen dozens of them in Edmonton and Calgary. Many of these folks will become buyers, because renting will not continue to pencil. There is plenty of macro research to back this up, real estate is cyclical after all. Credit is a joke for buyers who can afford $2000 rents, not really that hard to have decent credit if you have good income. Besides, LL are going to have to re-learn how to rent to this demographic as they want to be more nomadic and are renting for the experience value. The 12-month lease is an option on lifestyle flexibility, which I think is largely discounted today.

Interest rates don't have to move for more condo buyers to come into the market. We are as close to the bottom as you are likely to see without thinking you can time the market.

Investment product is still 15-20% above individual condos, so if you are a buyer of investment product, why not condos? I looked at one a couple weeks ago that had a fully funded reserve fund. Condo was converted in 2010s and well done in a solid neighbourhood. Bit of a head scratcher...

Also what is Boardwalk trading at on a per-door basis?
 
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Developer

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#19
Investment product is still 15-20% above individual condos, so if you are a buyer of investment product, why not condos?
Definitely agree with you Matt. Better opportunity for buying individual condos at this point in Calgary. Multi-family assets are trading at a pretty substantial premium
 
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Martin1968

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#20
Why condos at all? I remain convinced that all condos, older walk ups and new builds are bad income generating properties. Many folks bought these 'cheap' converted condos in Edmonton in 2008 when the market cratered, and even today heavily regret it. My own PM in saskatoon is boasting at how 'cheap' condos are and is loading up on them.

My two cents, cheap = crap. A much better Calgary play would be to buy multiple SF units and sell them off to owners a few years from now.. Commercial assets are even better and a decent apartment block is still a much better investment than a substantially discounted condo.
To add to that, these cheap condo’s that are being talked about in Calgary (Edmonton same situation) aren’t even in B class buildings. More like bottom C buildings or below.
They are bad for several reasons, re sale in the future, and any appreciation will be minimal, and looking at monthly condo fees in those older buildings you would be anywhere from $300.00 to $550.00 per month.
Cashflow non-existing. You would also need extra cash to update the outdated units.
Now try to update your tenant profile in a tired looking building.

Frankly, to me you purchase real estate much alike a modular on a trailer park. You will attract similar type tenants as well. Money down the drain.
Bad idea if you ask me.