TUC – Episode 2 Blog
Financing The Toronto Market
In our first episode we talked about our experience in the real estate industry, in this second episode we talk about financing in the rental apartment market.
Debt vs. Equity
We start off episode 2 with Steve Cameron, discussing the difference between debt vs. equity. Debt is the borrowed money that needs to be repaid, plus interest, while the equity is the cash the borrower puts into the deal.
In regards to financing a deal, when you hear someone say 75% LTV (loan to value), it means the lender will provide 75% of the financing, while the borrower will need to supply the other 25% in cash.
Over the past few years, there have been more major players offering equity to builders in Toronto, and the difference here is that the debt has a charge on title, and the equity doesn’t. Equity is unregistered and is an agreement between the developer and whoever is providing the equity. Equity deals need to be highly structured to determine who’s putting the money in, when are you putting it in, and who gets to take their money out first.
When determining who to provide a loan to, the top 5 banks will typically choose astute, sophisticated borrowers with a track record of success. At Cameron Stephens, Steve discusses helping younger builders (first or second deals) get started in the business – “as long as there is a good team around them, we help them find a way to get the deal done”.
Growth In The Toronto Market
Price growth in the Toronto market has been a hot topic on everyone’s mind, and Ben reflects back on 2017, when pricing went up 35% in a year and should have been considered a bubble, as pricing has been trending downward for the last 2.5 years. Part of this decline is due to the composition of the units in the mix, appealing to more first time buyers with stacked townhomes, back to backs and condo townhouses. Unfortunately, we see NIMBY’s fighting suburban affordable homes outside of Toronto, as much as we see NIMBY’s fighting condo towers in downtown Toronto.
In 2019, the resale market has returned, Bullpen Consulting focuses on the high-rise apartment market, and as prices went up 10% in 2016, 30% in 2017, and 15% in 2018, that he is a little nervous because “we cannot see this type of massive growth and not have a correction.” In 2019, we’re seeing the market begin to slow down as investors are hold and rent investors – and as pricing continues to go up at this pace, it will be harder to find renters who can afford these prices.
As rents are on the rise, Steve poses the question “Is this an indicator of a bubble, or is this an indicator of a developing city with a lot to offer, with a large financial hub and a great safe place to visit as a tourist and move as an immigrant?”
The idea that Toronto is in a bubble has been another hot topic of conversation as prices increase at the rate they are. But the fact is that Toronto is a great place to live, where people want to be, that will continue to grow over the next 25 years. Toronto is quickly joining the ranks of the top major cities in the world and we’re hardly comparable in terms of prices, like in New York.
With the uptick in rental pricing across the city, developers are finally beginning to see value in bringing new purpose built apartment rentals to the market. However, we’re building a lot less bedrooms and a lot less square footage than we did back in 2002, and we’re still getting a ton of people in to the city every year. Basic supply and demand says we need to build more. Which means we need more developers, taking more risks. Just as the prices are up 30%, costs are up 30%, which ultimately is passed on to the end buyer.
In Episode two, we discussed debt vs. equity, supply and demand, and the Toronto rental market. Stay tuned for our third episode of Toronto Under Construction coming in early 2020.
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