Following its billion-dollar sale of 44 rental apartment buildings in the Greater Toronto Area, private equity firm Q Management LP is fundraising for a $500-million war chest to do it all over again.
In November, Q sold a collection of rental apartments, known as Continuum Residential REIT, to Toronto-based Starlight Investments for $1.7-billion, including debt. The sale price translated to a 3.5-per-cent capitalization rate, among the steepest valuations in Canadian commercial real estate history, relative to the properties’ rental income.
Q is now back in the market to raise money for its sixth multifamily property fund, as rental apartments are known in the real estate world, and the proceeds will be used to purchase more rental apartments in the GTA.
Despite the quick turnaround from the recent sale, Q chief executive Dan Argiros said he is encouraged by the speed with which Q was able to invest the $350-million it raised in 2018 for its fifth fund, and by investors’ hunger for rental apartment buildings in Canada – particularly in the GTA.
A mix of extremely low vacancies, strong population growth and muted supply increases have turned these towers into lucrative investments.
Seemingly out of nowhere, Canadian apartment buildings have become one of the hottest asset classes in the world, and institutional and high-net-worth investors who are desperate to find the next great deal are likely to invest through local players such as Q. Recently, private equity giant Blackstone has partnered with Starlight to invest in two portfolios of rental properties in Canada.
“There is a strong desire to be in this segment of the real estate market because there’s real growth,” Mr. Argiros said.
Driving this growth is the potential for rent increases as tenants turn over, because rental supply across the country, and particularly in the Greater Toronto Area, is extremely tight. Hardly any apartment buildings have been built since the 1970s, and that’s pushed vacancy rates to 1.1 per cent in Toronto. Across the 44 Continuum buildings, the average vacancy rate was just 0.3 per cent.
A number of publicly traded real estate investment trusts (REITs) also invest in multifamily properties, and across their portfolios there are examples of rents jumping 25 per cent to 30 per cent when there is tenant turnover.
Q has raised money for multifamily funds for roughly two decades, but its bet on the GTA, particularly on properties close to the GO commuter trains that travel into Toronto, has paid off lately because people are flooding into the region.
“Population growth is the single most important factor in the long-term value of real estate," Mr. Argiros said.
Toronto isn’t alone. The federal government is welcoming newcomers to help fuel economic growth and other cities such as Montreal and Vancouver have become hot spots for global tech talent.
But the problem is particularly acute in Canada’s largest city. In 2018, Toronto’s population jumped by 125,298 people, but new completions of all housing types rose by 37,750 units.
A similar housing shortage, particularly for rentals, is becoming more common across the Western world, prompting some backlash. In 2019, the United Nations’ housing adviser called out private investors for turning rental properties into commodities, creating the potential for tenants to get squeezed – particularly in the United States.
Starlight, the company to which Q recently sold its large apartment portfolio, just raised $216-million to deploy into rental properties in the United States, telling investors there is the potential for "significant increases in rental rates” by making minor fixes to the properties and then hiking rents.
Q’s Mr. Argiros said that while his firm is not building new rental supply, which would help to alleviate the current vacancy crunch, many of the properties Q purchases “have been undermanaged and undercapitalized." When Q purchases a property, he added, "we invest in the building.”
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