Condo cap rates fall below 4%

by Vernon Clement Jones05 Nov 2012

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.”

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