Monday, 05 November 2012 10:25

Condo cap rates fall below 4%

Written by  Vernon Clement Jones
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New research suggests cap rates for Toronto condo investments are running in and around 4 per cent, despite some of the highest rents in Canada and the kind of preferred pricing many players access.

An analyst with Veritas Investment Research in Toronto arrived at the figure after comparing 84 condos for sale in the GTA and Vancouver with their rental-unit equivalents. That 4-per-cent cap rate represents what buyers looking to rent their properties can win in terms of annual returns on their investments, said Ohad Lederer.

That kind of return is about half of the 7 per cent to 8 per cent many investors look for in a condo investment. It also challenges conventional thinking about the profitability of Canada’s most buoyant condo market, which relies on a robust rental demand that outweighs supply.

The fear is a value correction in condos could further challenge profitability for that segment of property investment, say analysts, pointing to as much as a 15 per cent drop in condo prices over the next 24 months.

Condo investor have already started to pull back from a two-year buying frenzy, with sales by property investors falling between 30 per cent to 40 per cent this year, according to another industry report.

“Things have definitely slowed,” Ben Myers, executive VP of Urbanation, said last week. “I do anticipate that pricing is going to be fairly flat in both the new and resale condo market for six or seven months. After that, it becomes a little hard to predict what will happen.”

Last modified on Monday, 05 November 2012 11:36

3 comments

  • Will Lenssen Friday, 28 December 2012 01:11 posted by Will Lenssen

    Guelph is strong and with a reduced amount of inventory for the required Buyers, we should remain that way even in the codo market. Condos and townhomes are going fast here.

  • Aldo9226 Saturday, 10 November 2012 22:47 posted by Aldo9226

    I you do a proper analysis using rental income, property taxes, insurance, management, CAM fees, repairs & maintenance, the CAP rate is actually 2% or less !

  • RC Wednesday, 07 November 2012 10:18 posted by RC

    The analyst should compare condos that have sold and not that are listed. Toronto has had cap rates around 4% for the past 10 years and they are creeping up 4-5% now if you know what to look for.

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