Real Estate Development in Toronto

Happy New Year to all, two weeks ago I had a chat with Pat Berne of the Pemberton Group.

I found it extremely insightful to see how financing works from a developers perspective. In Canada, a developer receives construction financing to build a project based evaluating the following criteria:

1. Equity - How much has the developer invested into the land where construction is to take place
2. Track Record - Has the developer displayed a history of completing projects on time and on budget
3. Valuations - What they plan on selling the units for
4. Buyers - How much deposit have they invested, the structure of the deposit, credit situation, who the are (i.e. close relatives, family and friends vs actual buyers)
   

What has separated Pemberton from other hi-rise developers is their specialization. They understand their craft, and they don't just hire a general contractor to build and have free reign on managing the construction budget or don't allow the marketing side have the final say on how the condo should be built.

There are rumors in the city where fantastic marketers having trouble completing projects because of huge cost over runs and changes, and examples where great construction companies mess up their marketing and have troubles getting sales off the ground.

According to Berne, "you have to understand the impact of changes, and what they will have on the entire project." That is why on a daily basis, Berne and his people are on top of all costs, changes to design, construction, and marketing of a project.

The challenges facing Berne are two fold: Affordability and Acquisitions

Back in 1989, condo prices were about $400 psf in 1989 real money, they quickly fell to $180 psf because of affordability. While Berne doesn't see a crash up coming because this recession is a bank/finance recession rather than a job loss recession...he does see problems for land owners trying to sell to developers for unrealistic prices.

Land owners been approaching developers to buy their land as if it was already zoned to build a hi-rise, not realizing the tremendous zoning risk to developers.

"We've had owners calling us and saying that you should buy our property at our price because the property down the road had 20x coverage...which was completely false, " says Berne. "We won't buy anything that doesn't make sense to build today, we won't spec that appreciation will still occur to bail us out, otherwise it would make our (homes) less affordable"

While not expecting appreciation to bail us out, Berne constantly monitors immigration, incomes, unemployment, interest rates when planning their next steps, and his research is showing that we are going through an period of price stability.

What's his advice to investors? keep on top of the market and know it inside in out to find value (continue to shop around), understand how much you will spend on financing now and in the future..and most of all, keep writing those offers.