Denzity Insights: Canada Real Estate Outlook 2020 With Robert Veerman


Canada Real Estate Outlook 2020 With Robert Veerman

Connect:

LinkedIn: https://www.linkedin.com/in/robert-veerman-26a88345/

The Canadian real estate market has been popular among overseas investors for the past few years. As some of our users asked us about how the COVID-19 and economic downtown have impacted the market, we think it’d be great to have a real estate expert to shed light on this topic. Today, we have Robert sharing his insights.

Robert Veerman is a commercial real estate broker at CBRE Canada. He buys and sells investment and development properties in Canada with a focus on Vancouver and Toronto.

  • The impact of COVID on the Canadian real estate market
  • The shift in investors preference
  • The outlook for the remainder of 2020
  • Any major macro influences that would affect the market

As it can be difficult to catch some minor errors, transcripts may contain a few typos or inaccuracies.

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Sources:

US Federal Reserve: https://www.federalreserve.gov

Anchored Retail:

Safe Haven Investment Destination: In simple words, safe-haven investments are investments that are promising investments and have a comparatively short period of market failure

https://www.investopedia.com/terms/s/safe-haven.asp

China Global Tax Scheme:

H1B Visa: The H1B visa is an employment visa issued by the US government to foreign nationals in order to work in the US temporarily.

https://travel.state.gov/content/travel/en/us-visas/employment/temporary-worker-visas.html

Capitalization Rates: Capitalization rate or cap rate is the percentage rate of a property’s income.

https://corporatefinanceinstitute.com/resources/knowledge/valuation/capitalization-cap-rate/

Interest Rate: The interest rate is a certain percentage of the amount of money lent or borrowed that is charged by the lenders to the borrowers upon returning the original amount over a period of time. 

https://www.thebalance.com/what-are-interest-rates-and-how-do-they-work-3305855

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Our video creator:

Patina Design Lab is a strategic design consultancy firm that helps businesses with a wide range of design services.

https://www.patinadesignlab.com/

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Alright, let’s get back to the transcript of the show. Enjoy!

Darren :  Hey, Robert, welcome to the show.

Robert:  Thanks, Darren. Glad to be here.

Darren : Yeah, I mean, this is very exciting because we’ve been friends for so long, I think for more almost two decades. And it’s a good time to talk about our jam, real estate. So, you know, for the audience who might not know who you are, would you mind telling them about yourself and your work? 

Robert: Sure, yeah. My name is Robert Veerman. I’m a commercial real estate broker at CBRE in Canada. I cover two major markets here, Vancouver and Toronto in buying and selling real estate. 

Darren: So for the audience, right, I used to live in Vancouver. So when it comes to like Vancouver real estate, I’m always very excited. Because even though every time I go back to Vancouver, there’s so many changes. So there’s one thing that I’m sure a lot of people are curious about, it’s how has Covid-19 impacted the Canadian Real Estate Market at large, especially in Toronto and Vancouver markets? 

Robert: Yeah, for sure. I mean, I think Covid definitely is impacted. Everything everywhere around the world. I’ll just talk about it from a timeline perspective. So Covid, kind of first hit, or I would say the lockdowns first happened in Canada, in the middle of March. So for the first two months, I’d say in March and April, there was this virtual shutdown of everything. And that meant for real estate as well. So for residential real estate, as well as commercial real estate, I’d say all kinds of activity trading just stopped. But what was happening in the background, in a huge way was everyone was just trying to figure out how Covid and how this lockdown was going to impact their portfolios, how it was going to impact their real estate. So I was spending a lot of time with clients at that point, not buying and selling stuff, but helping them just shore up the portfolio, buying a lot of data points to understand that. I mean, real estate, fundamentally, is user landlord, you collect rent from the tenants, and then usually the landlord has some kind of financing on it, and you’ll use that rent to pay the banks. So the fact that this is worth running, and there’s this whole fear that, you know, people couldn’t pay rent, because, you know, for example, restaurants, they couldn’t, serve food, and they couldn’t pay rent, they had no money, and the landowners wouldn’t get money, and the banks don’t get money, and the whole system would basically shut down. So there’s this whole fear of having a liquidity crisis. That being said, the, I guess the government response, federal, provincially, and municipally, has been fantastic. And they have definitely worked very, very hard to create a lot of liquidity. And I’d say overall in the industry, everyone in it, from banks, to landlords, to tenants to government have been very, very, very hands on and very shoulder to shoulder working together to make sure things are okay. So now I’d say since then, moving forward to June, July, August, September, things have definitely stabilized. There’s been a new norm that’s set in. And honestly, things are really back to business with, you know, covid precautions, of course.

Darren :  That’s good to know, because it’s something that I hear a lot. And then obviously we’re now in September, and a lot of places around the world are recovering. So due to Covid-19 and the economic impacts, right, do you see a shift in investors preference when it comes to their mandates? 

Robert:  Yeah, for sure. I mean, everyone has shifted their mandates. I mean, to a degree, like the most flexible guys, like myself have definitely shifted my business. The private equity guys, you know, the individual investors have definitely shifted their business, even like the larger institutional investors, obviously, they have a lot at stake, they have a lot of existing portfolio, a lot of existing assets, but even they have adjusted their outlook on the market. Generally speaking, most things have come out of it unscathed. Most guys, artists in steel position. Now there have been a few shakeups like three deals I’m working on right now are receivership deals.They’re you know, properties where the landlord or the owner base a default on their mortgage and has no means to repay it and the bank has been possessing them and forcing them to sell and I’d say a lot of private investors naturally gravitated towards those deals. And, you know, there’s definitely a frenzy of activity, I’d say, from everyone across the board asking me, “Robert, you know, what kind of deals do you have, like receivership deals? Like, Where can I buy 50 cents on the dollar.” And this definitely did occur mostly in the development space, because those are at the most risk defaulting, you know, like, it’s not a development property it’s not like a income property, where you’re just collecting rent from a tenant. Development property, you know, you require certain things like pre sales, you know, you have ongoing construction, and you have much higher leverage loans. So if anything stops for whatever reason, it can have a much bigger impact on your bottom line. So, that’s definitely happened. But that being said, it hasn’t been the norm. Like, there’s definitely more people asking for that kind of product than there is available. And the pricing, though, it’s not exactly what people expected, you know, people are looking for 50 cents of the dollar. But the reality is, it’s more like 70, 80, 90 cents in the dollar. Because at the end of the day, a lot of these properties are backed by mortgages from banks, and the banks will have loan to value ratios of, you know, 70%, 80%, and the banks themselves don’t want to lose money. Yeah, I mean, I think another big trend I would say is that debtors cheat. And it’s definitely here to stay. And, you know, the US Federal Reserve now is that they’re gonna keep rates low for the foreseeable future. The Bank of Canada is really in lockstep. And financing overall is like much cheaper, it was very hard to get in the beginning of Covid, because the banks themselves couldn’t even underwrite what was happening. But now that things have settled down, the banks can kind of see the trajectory again. And financing is very, very, very cheap. So because of that, actually, I’d say there’s three main asset classes that are very, very much in demand. Not like receivership type deals, but like more normal market deals, that’s multifamily, industrial and it’d say grocery anchored retail. Those are the three asset classes that have continued to do well through Covid, if not have done better. Just to give you a brief example, for grocery retail, I talked to a few of like the biggest grocery stores in Canada. And they’re saying that their sales through Covid, you know, from March till now has been the highest ever on record, more than during Christmas season more than Thanksgiving. So their business is booming, long and short. Multifamily, people always need a place to live. And we’ve done a servia profile of all our investing base, Google multifamily. And I’d say 90%-95% to 99% of them reported that they have no issue collecting rent, and industrial logistics, it has always been in vogue. It always been popular even before Covid. And even now with more online shipping. You know, and what have you it just continues to be popular. 

Darren : I see. So, you know, like I know you for quite some time, right, and you’re quite involved with the Asian investors such as Hong Kong and China, how’s the demand for Canadian assets fared over during 2020? 

Robert: I mean, I’d say, Canada has always been a popular destination for you know, international capital. It’s always been seen as a safe haven investment destination, not the greatest growth, you know, Canada’s not Vietnam. But, you know, very stable, and the kind of the economy is largely backed by the American, it’s a shadow of the American economy as well. So people have always come here. 2020 I haven’t seen that much asian interest. I think for several reasons. Mainland Chinese interest, there is still some and you know, we’re doing a couple of deals with them. But it has not been the wave that we’ve seen in the past, I’d say five to ten years in Canada. And I’d say one of the major reasons behind that is one, cap controls in China. It’s just harder and harder to bring money out of China. Two, it’s a trade war, right? So you know, like, if you’re a Chinese citizen, I think the Chinese government now is doing all it can to make sure that capital stays in China. I mean, you live in Hong Kong, if you’re a Chinese citizen in Hong Kong, you pay more tax income taxes living in Hong Kong than you do if you’re working in mainland China. So I think the Chinese government’s implementation of the global tax scheme is definitely pulling people back and having people second guess or, think, again, about taking capital out. But that being said, actually, a kind of interesting trend that I’m seeing right now, our team is seeing right now is that we’re seeing Chinese capital being redeployed into Canada, but not from China, but from other places in the world, namely, the US. I think the trade war is definitely forcing some players to sell their assets in the US whether for political reasons, or just no safety of their investment, I think there’s a general fear that having a capital in the American markets, you know, it may not be safe, right, if something can happen to it. So we’re actually seeing quite a few groups that have previously invested in the US but never invest in Canada, now looking at Canada. For Hong Kong, investors, I think there’s a big buzz about you know, more Hong Kong, investors looking at Canada, I’d say I’d see it on the residential scale.I think a lot actually, I’d say there’s a good number of Hong Kong people, you know, who I think have traditional ties to Canada, who are, you know, kind of redeploying back into Canada? And I wouldn’t say it’s more from a capital perspective, more from like, a living perspective. You know, I think I’ve had some people reach out to me, asking me about jobs here. And with the job environment, especially how real estate is in in Vancouver in Toronto. So I think there’s definitely a migration of people, but not necessarily capital from Hong Kong. 

Darren : I see. So what’s your outlook for the remainder of 2010? 

Robert: I think a lot of big deals are going to happen. One thing I forgot to mention, actually, you asked me about Asian investors but I’d say one of the main foreign investors in Canada right now are the Americans and maybe the Europeans. And I think for the rest of 2020, I think pencils are backed up in September. Todays september the 17th. The pencils are definitely backed up in September. And I think we’re going to see a lot of activity, we’re going to see a lot of big activity happen in the next few months, I’d say in the next six months, things may close in 2020. Things may also close in the first quarter of 2021. But I’m working on some deals, I can’t disclose what but a lot of the big players are making some big moves right now. Either they’re buying or selling and repositioning. I think what a lot of people don’t realize is that, you know, we’re still a peak market. And, you know, Covid has created like a low market, there’s no longer much of a market force kind of pushing things up or push things down. And I think a lot of players are using this opportunity to make strategic place that they’ve always planned to make. But they’re executing on this now. So for the rest of 2020, what do I see? I see a lot more American firms buying up here, namely buying multifamily and office. I think the Americans have two plays, or one play up here. And that’s they know that all the tech companies Facebook, Amazon, Google, want to open have opened and want to open more offices in Canada. For some reasons, Canadian dollars lower. It’s the same timezone as the US. It’s a short flight from the US and to get international talent now so like your top programmers from China, Indonesia, India, Pakistan, where have you immigration to Canada is much easier. US you have to get an h1 b visa, which is kind of up in the air right now with the current administration. But in Canada, if you have a job offer to say, Facebook, for example, or Microsoft, and you’re an Indonesian, for example, or Brazilian, it’ll take two weeks to process and get you working in Canada. So I think they see that as a very attractive alternative, you know, to secure that human capital. And I think the American real estate companies, you know, are buying office based on that, they know that these tech companies still want to expand. And I think they’re buying multifamily as well, because it kind of goes hand in hand, if you have population coming in, they need a place to live. And they’ll be pressures on rent growth, especially in Vancouver and Toronto, like they can see here it’s like, what less than one 1%. So there’s no new product, if one person moves in, there’s like no, no, for them to live, right. So there’s a lot of pressure for rent to go up. And I’d say a lot of like the big institutions as well, they Canadian institutions, which have a very, very big presence in real estate in Canada and in the world honestly, they’re one like the biggest investors globally in real estate. In China, Hong Kong, Europe, what have you, they’re going to be making strategic moves, buying and selling in Canada as well. 

Darren : I see that’s very informative. So you know a lot of the audience have actually asked me beforehand of the show, is that during just about macro influence, what are some macro influence you think investors should be aware of in the next few years, which will impact the attractiveness of investor investing in Canada? 

Robert: I think there are three things for sure. There’s three main macro discussion points that people should be aware of, if you’re a small investor, or a super large investor, the first is interest rates. Interest rates are going to remain low for the support seeable future. What does that mean exactly? It means that debt is going to continue to be cheap, and that there’s going to be further pressure for cap rates to go down. And for those who don’t know what a cap rate is, it’s basically the income of a property, like the first year’s income or property, their expected return. So if interest rates continue to stay low or go down, there will be pressure for good quality assets, you know, that have strong rents for the spread between the cap rate and the interest rate to go down. I think that’s one major trend that people should pay attention to. The second major trend is taxes. Through Covid, I think Canada is in a fantastic job creating liquidity. But they’ve also added a lot of new money to the supply. They’ve created a lot of new money. And I think all over the world, governments are increasing their deficits, so to speak, to help pay for this short term instability. But at end of the day, they need to get that money back somehow. And they aren’t getting it back through increasing interest rates for you know, like government bonds, they’re clearly not getting it back from there. I think one easy, very easy way for them to get it back is through increasing capital gain taxes, or any kind of transactional tax for investor, right. For all the people who’ve gotten more and more money in these past few months, you know, it’s the easiest way to get it back just to tax them on their investments. So I would look out for any kind of sign of capital gains tax increase in Canada, their budget is being put forth next year in the spring, q1 q2 of next year. So that’s definitely a thing to watch out for. And I think a lot of the moves people are making right now isn’t potentially an anticipation of that. I think if capital gains goes up, any kind of transaction tax goes up, they’ll be less trades, it will make the underlying value of the asset or the real estate worth less, in fact, will make it worth more because for anyone to sell, they’re going to have to sell for more to get a certain return if their taxes are up. So I think it’ll make things more expensive. For good quality stuff, obviously for stuff that’s not desirable or has issues, then that stuff will probably go down. But for stuff that’s super desirable multifamily, industrial, super stable, super safe, grocery, those, like will be harder and harder to trade. And the people who own that stuff will probably be in the best position.I’d say the third trend is immigration. Growth. Another way that I’d say the Canadian government can pay for a lot of this deficit. And the way that it historically has is just the immigration, and that’s through. Immigrants bring money, they bring capital. And they also, you know, increase the GDP of the country. So I think that’s generally a positive sentiment for Canada, you know, increasing immigration, because that will increase growth overall. So I think that’s another major trend to look out for. 

Darren : That’s very informative. I think that like everything you’ve said, so far is very in depth, so thanks for your time. So for time being right, what are some ways that if someone watches this video and wants to ask you more questions in commercial real estate or as a whole, how would I suggest them to reach out to you? 

Robert: Yeah, I’m sure my contacts will be above or below. I mean, why should someone reach out to me, I’m a real estate broker. I work at CBRE. We’re the largest, actually the largest commercial real estate company in the world, full service real estate company. We have a lot of different business lines, from investment to capital markets, leasing, property management, asset management, you know, the whole gamut appraisal.Me Myself, I work on the investment side as a broker. Yeah, if you’ve any questions regarding commercial real estate, or in fact, like commercial real estate in Canada, for that matter, feel free to reach out to me send me an email, give me a phone call. I think for people that don’t know real estate, and perhaps like they’re on Denzity, you know, looking for more insight in real estate and how to get into it, I would say this, like, it’s, it’s a great asset type, it’s a great investment to get into. And you can start very, very small. I’d say some of the biggest portfolios I’ve built from just one small building, you know, using, I guess, a celebrity as an example. I was, I mean, I went to school down in LA, everyone always used to talk about Arnold Schwarzenegger. Arnold Schwarzenegger is an actor. He’s this guy who came from Vienna, from Austria. He started buying commercial real estate, apartment buildings, actually, you know, when he first started. You buy one, and then you refi it a few years later, then you buy another one. And you just keep rolling, right? 

Darren : Yeah. You know, I think he covered a lot about his real estate deals in his book, how to recall. So it’s interesting because he make his money before his acting career kicks off. So yeah, I think real estate, I love this sector and that’s why we’re here. And I want to give a shout out to our High School St. George’s too, you know, that’s how I know you and have become friends. So I’m sure in round two, we can get other people like our friend Danny, who you know, as a pension guy is an investment manager, he can talk more about investing as a whole in real estate or even fixed income assets. So I’ll say again, thanks for your time, and I really appreciate your time, making this happen together. 

Robert: We’ll do, thanks Darren. 

Darren : Okay see you next time. Thank you. Good day. 

Robert: Cheers. 

Darren: Bye.


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