Pension funds take a stake in Calgary rentals

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The Calgary rental market is attracting pension funds that see a lucrative, low-risk and long-term investment in rental properties.

Last year, Intergulf Development Group sold 50 per cent of its Calgary-based Aura Rental Tower to Hydro Quebec, says Intergulf vice-president Shaadi Faris. The 24-storey Intergulf-Cidex project is currently renting, with one-bedrooms starting at $1,300 and two-bedrooms starting at $1,800.

But pension funds aren't just acquiring rental assets; they're increasingly getting involved in the development of them, either by partnering with developers or through asset-management service providers such as GWL Realty Advisors, Bentall Kennedy and Oxford Properties.

"We are seeing pension funds involved even earlier in the process," says Mr. Faris. "It's usually, 'We'll build it, you buy it and you have your income.' But now some are actually getting involved early. Albertan and national pension funds, they are getting very active in real estate space. Not only do they want a cash-flowing property at the end, but they want to participate in the increase in value, as well. To see them becoming even more active is really interesting.

"You'll see some more announcements with partnerships and deals. It's a new partner, a new source of capital, a new way of doing things."

Calgary is fertile ground for pension fund investment because, like a lot of Canadian cities, there's been little rental stock built over the last several decades. Rents are relatively high, and the vacancy rate is low.

Calgary surpassed Vancouver's position as highest rent city last year. The Canada Mortgage and Housing Corporation's 'fall rental market survey said Calgary had the highest rent in Canada for two-bedroom apartments in new and existing buildings. Vancouver was second, followed by Toronto, then Edmonton. In October, a two-bedroom apartment in Calgary averaged $1,322 a month.

"The reason [pension funds] have been more interested in building or developing new assets is because there are very, very few assets to buy, and the demand for residential rental has been very, very strong," says real estate analyst Matthew Boukall, of Altus Group.

"It provides a relatively de-risked asset that provides good, consistent cash flow," says Mr. Boukall. "Compared to office buildings, there is substantially less vacancy risk in a rental building since there is almost always a tenant available."

As well, real estate is looking a lot better than the stock market, adds Mr. Faris.

"They are pulling out of stocks because it's so tumultuous. They need to meet obligations. They can't suffer through the swings we've seen, going back to 2008. Or the way oil has swung."

All the investment activity around rental buildings has had a positive impact on the vacancy rate, according to Mr. Faris, who says all his Calgary projects are rentals right now.

"Rental stock in Calgary went up for the first time in several years this past year, and that's because they've added more product to the market," he says. "It's an interesting trend. Rentals tend to be a safe haven. People are on the sidelines, buying."

Calgary's vacancy rate did go up for the first time after a steady four-year decline, according to CMHC. It was at 1.4 per cent in October, which is a 1-per-cent increase over the year before.

Vacancies have been low partly because of strong demand from interprovincial migration.

Tony Astles, Bentall Kennedy's executive vice-president for real estate services for Western Canada, has two rental projects about to launch in Calgary's Beltline. As adviser for more than 130 pension funds, his company is also looking to Calgary for new rental projects. He says that rental properties are coming onto their radar because of the combination of strong demand and aging rental stock. It makes for the perfect portfolio strategy.

"I think that many institutional investors in Canada are under-weighted in multifamily rental, as part of their real estate portfolio," says Mr. Astles. "Part of that is that the development of rental properties hasn't been consistent over time. Not since the seventies was there a large wave of rental property development. The economics hasn't supported it for some time. So, because the rental stock is older, and there's not much property being developed in the last 20 years, there has been an interest in developing it where it makes economic sense."

Calgary makes sense because it's got the demand but not nearly the supply. And for a developer, partnering with a pension fund and preselling the project makes sense because it lowers risk, says Mr. Faris.

"That can materially affect the type of deal you do. It makes us happy, and the banks happy. Canadian pension funds are some of the biggest in the world. They are sophisticated and they are in it for the long term. A partner with a good balance sheet, that helps you, as well.

"And pension funds are patient money. They are looking for stable cash flow and their requirements are a bit low, so they are allowed to be more patient."