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Ivanhoé enters Quebec City’s saturated condo market

Ivanhoé Cambridge’s planned development includes 400 rental units, 200 condos and more than 43,000 square feet of retail and commercial space.

Ivanhoé Cambridge, the real estate arm of the Caisse de dépôt et placement du Québec, is dipping its toes in the Canadian condo business for the first time. And it's doing so in Quebec City, a condo market that economists already believe is oversupplied.

Ivanhoé Cambridge is partnering with the real estate division of Sobeys Inc. and some local investors to build a project that the group expects will ultimately include more than 400 rental units, 200 condominiums and more than 43,000 square feet of ground-floor retail and commercial space. The partners will make an initial investment of more than $50-million.

The decision to invest comes despite warnings from economists and real estate observers that Quebec City's condo market is showing signs of strain.

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"Markets in Montreal, Quebec City and Ottawa have been flooded with an overhang of inventory of unsold condos," Toronto-Dominion Bank economist Diana Petramala stated in a recent research note.

She also noted that home prices in Quebec City, as well as in Toronto, Montreal and Vancouver, look overvalued and "will likely feel the pinch from modestly higher interest rates over the next two years."

The Caisse de dépôt has a mandate to grow the funds deposited by its clients, mainly Quebec-based public and private pension plans, while contributing to the province's economic development.

Ivanhoé Cambridge owns the Château Frontenac hotel in Quebec City, as well as some retail properties. It has historically concentrated on retail and office space, but has moved into residential properties in recent years. It now holds more than $2.5-billion of multiresidential buildings, making up more than 7 per cent of its portfolio.

The majority of the company's properties are in the United States. It has smaller but significant holdings in Britain and Canada, as well as some holdings in countries like China. It says it wants to focus on big cities: London, New York, Los Angeles.

But it has largely shied away from the condo business, preferring rental apartments. That's in large part because the returns from a condo development are made relatively quickly, in the few years it takes a project to be built, while pension plans tend to focus on long-term investments that can spin off steady profits for a decade or more.

Ivanhoé Cambridge dabbled in one condo project in London, and "we're getting our money with a very nice profit, but then it needs to be reinvested," says Sylvain Fortier, executive vice president at Ivanhoé Cambridge. "And you're not going to find these opportunities all the time. So you almost need to factor in the time that the money is back in your bank account sitting at a zero return."

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When it comes to the Quebec City development, he said the appeal lies in its location close to Université Laval, shopping areas and Hopital Laval, as well as the fact that it's a mixed-use project that spans condos, rentals and retail.

"We like the price point we're shooting for – it won't be as luxurious or expensive as others," Mr. Fortier says.

Sales of existing homes were down 7.4 per cent in January from a year earlier in Quebec City, while the average sales price dropped 1.5 per cent.

Compared to other housing types in Quebec City, "the condo segment is showing the most stress," according to Ben Rabidoux, a housing analyst who heads his own research shop, North Cove Advisors.

The new project is "two, three years out – so like any development project you need to close your eyes a little bit and figure out where the market will be by the time you're open and ready. But again, I go back to location and overall demand," Mr. Fortier says.

Asked whether he would consider a condo project right now in Montreal, which is also on economists' watch list, Mr. Fortier replies: "No, that falls in the 'life's too short' bucket … we'll stick to rentals."

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