B.C. investors would be wise to scout three Prairie provinces for future cash flow and appreciation
by Ozzie Jurock
Tuesday, August 20, 2013
Real estate investing is a bit like duck hunting. You have to set your aim to "lead" the duck to allow for the distance the duck will fly while your shotgun pellets are getting to it. If you don't, you'll always be shooting where the duck was, not where the duck is.
It is similar in the real estate market. Knowing where your potential tenants will be in the future is vital. Values grow where people go and people go where the jobs grow.
Since your returns depend on people with jobs that are likely staying, it is important to find out about livability, vacancy rates and new job creation.
Multi-family real estate values thrive on fully tenanted buildings and, if you want capital appreciation, you need to know where the tenants are flocking. I stress capital appreciation because low capitalization rates today make it difficult to earn returns.
Vancouver's expensive apartment-building market is (finally) seeing price resistance this year, as investors balk at paying record-high "per door" prices (the average price of a Vancouver rental apartment is now north of $220,000) and suffering cap rates in the 3 per cent range. As a result, first-half sales this year flatlined after years of growth.
But Vancouver investors have a ready option, and it is to the immediate east.
Today in Canada there is little doubt where the tenants are heading: straight into Alberta, Saskatchewan and, to a lesser extent, Manitoba, which form an economic powerhouse in the heart of our nation.
Big players in the multi-family market, such as real estate investment trusts (REITs), have already figured this out. For instance, Boardwalk REIT of Calgary and Toronto-based Canadian Apartment Properties REIT spent an average of $33 million a month in 2012 just in Western Canada, and they are not too picky about what they buy as long as it cash flows.
The reason is clear. Yield and return. According to the REALpac/IPD Canada Annual Property Index, over the past 12 months real estate outperformed public equities at 5.9 per cent, bonds at 4 per cent and inflation at 1 per cent. The total returns varied between six Canadian cities surveyed for the index, but the biggest returns were in Calgary, up 17.4 per cent; and Edmonton, up 17.1 per cent.
OK, where should you hunt in 2013 and beyond?
Well, certainly research where the big boys - and tenants - have gone and are likely to go. Here are three places that we have been recommending to our Jurock Real Estate Insider subscribers.
Calgary and Edmonton
Calgary and Edmonton currently have the lowest apartment vacancy rates in Canada, at 1.2 per cent. Calgary led all big cities with an average 7.2 per cent rent increase in the past year (Alberta has no rent controls). According to Statistics Canada's quarterly population estimates, in-migration from other provinces and immigration totals about 68,000 persons per year arriving in Alberta, with most heading for the larger cities.
Interprovincial migration to Alberta in the first quarter of this year was the highest in nearly 40 years at 13,400, including 2,500 from B.C. and 6,000 people from Ontario.
The lure is jobs. Calgary's unemployment rate is 5 per cent, and it is 4.6 per cent in Edmonton, second lowest in Canada after Regina and Saskatoon.
With stiff competition for apartment blocks investors can also look at buying condominiums and renting them out.
CMHC estimates that 32 per cent of Edmonton condos are being rented out, for example, a total of nearly 13,000 as of the last count. The vacancy rate for condos is 2.5 per cent and the typical rent for a two-bedroom is $1,268 per month - or about 20 per cent higher than the overall apartment market. Similar trends are seen in Calgary.
Think of the ducks: your tenants are flying into Alberta and that is where you should be investing.
With an apartment rental vacancy rate of 2.6 per cent Saskatchewan's biggest city is a prime landlord investment market.
Saskatoon is drawing a lot of young people - even from Vancouver - despite its wintry weather. With 6,100 migrants arriving last year - a record high - the city now has 272,000 residents. It also has the strongest economic growth of any city in Canada this year, as forecasted by the Conference Board of Canada, which pegs its growth at 3.7 per cent this year and 3.8 per cent in 2014. As a comparison, Vancouver will see about 2.3 per cent GDP growth both this year and next.
Saskatoon is bursting with jobs, with an unemployment rate at 3.9 per cent. Housing starts are at a 30-year high; building-permit values hit a record of $1.1 billion last year; and the average weekly wage is around $910, compared with $869 in much-more-expensive B.C.
West is best
Are there other cities to buy in? Absolutely. Western Canada is the place to be. The power shift east to west is seriously underway. We at Jurock predict the oil pipelines will be built. The LNG pipelines will be built. The LNG terminals will be built. More people will retire in the West. More immigrants, particularly business immigrants, will come to the West. So, buy Prairie properties with good cash flows, good "B" locations and caring tenants. Watch the vacancy rates, watch the big boys but, above all, watch where the ducks will be flying.
From the Western Investor, August 2013
Ozzie Jurock is a Vancouver-based real estate investor and publisher of the Jurock Real Estate Insider. He is a contributor in Donald Trump's book, The Best Real Estate Advice I Ever Received. Reach Ozzie at email@example.com or ozziejurock.com.