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Investors spent a record $8.38-billion purchasing apartment buildings in Canada last year and another $4-billion in the first half of 2019, a sign that higher rents and low vacancy rates are attracting more capital to the sector.

Commercial real estate firm CBRE Canada says in a new report that multiunit residential rental buildings have become one of the hottest real estate asset classes in Canada. Sales volumes climbed 31 per cent in 2018 over 2017, marking the fourth consecutive year of rising sales.

CBRE Canada vice-chairman Paul Morassutti said more deals are coming in the second half of the year. “Our entire national investment team is telling us that the pipeline for the rest of the year is very, very full, [but] it’s too early to call whether we’re going to have another record year of apartment transaction activity,” he said Tuesday.

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Zero vacancies, sky-high rates: Inside Canada’s rental housing crisis

If sales do not top 2018, it will not be because investor demand is waning, he said, but because there are so few rental buildings available for sale.

Mr. Morassutti said there is little inventory on the market because many landlords are reluctant to sell assets that are performing so well and because many individual owners are also concerned about the capital gains taxes that will be owed when they sell their long-held assets at a huge profit.

“Some owners have privately told me these are assets their grandchildren will own one day,” he said.

Mr. Morassutti said more large investors are opting to build their own apartment buildings because they cannot find high-quality rental options to purchase.

The CBRE report said Canada’s population growth has combined with the rising cost of home ownership and a lack of rental supply to drive up demand for apartments and push rent levels higher.

The result is a growth in returns in the multifamily apartment sector, averaging 9.8 per cent as of March this year. Investment returns on apartments were second only to the booming industrial sector, where rising rents for warehouse space pushed average returns to 14.1 per cent for the 12-month period ending in March.

By comparison, office properties posted a 5.2-per-cent return over the same period, and retail properties returned 3.7 per cent.

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Mr. Morassutti said multifamily rental investments have long been a safe harbour in volatile economic conditions, so investors traditionally accepted lower returns for the security. But with rents climbing quickly in most parts of Canada, apartment buildings are suddenly offering soaring returns combined with lower risk.

“What’s happened over the last few years has been that you take the safe, stable secure characteristics of this asset class and you now add in a significant growth element, and it’s really the combination of those two things that is making is so attractive to investors,” he said.

Apartment building rents climbed 4.4 per cent annually over the past two years in Canada, including a 5-per-cent annual increase Toronto and 7.1-per-cent growth in Vancouver.

Canada’s national vacancy rate was 2.4 per cent in 2018, remaining well below the 10-year average of 2.6 per cent, and below the average vacancy rates for other types of real estate assets. In the United States, by comparison, multifamily vacancy rates averaged 4 per cent last year.

There has been a shift in the types of investors targeting apartment units, CBRE said. Private Canadian investors and real estate investment trusts have historically dominated the sector, but a growing number of private-equity funds and pension funds have also been targeting apartment buildings in the past few years.

Private investors accounted for 31 per cent of apartment building purchases in 2018, followed by pension funds at 26 per cent, private equity funds at 16.5 per cent, foreign investors at 13 per cent, and REITs at 11 per cent, the report said. Other institutional buyers accounted for the final 2.5 per cent.

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