Cancelled projects?

[cabbagetowner]

Someone pointed out that if a building is pre-sold to the 70% level with 20% deposits that "only 14% of the total market value of the project is in trust"....that is true but it would be a greater percentage of the cost of the project (assuming the builder was hoping to make a profit over the cost of construction).......

the percentage sold that is advertised in the market represents units, this usually does not accurately reflect the total market value of the project that is sold since there's a diversity of the units. eg. sometimes you'll see 50% of the units sold being all of the studios and smaller units but it represents a significantly lower amount of the overall market value of the building. The portion of the total market value of the building sold is more important than the number of units and that is what gives the green light.

 

[cdr108]

Thanks TOareaFan for the 'insider' information !

 

[Quanttrader]

the percentage sold that is advertised in the market represents units, this usually does not accurately reflect the total market value of the project that is sold since there's a diversity of the units. eg. sometimes you'll see 50% of the units sold being all of the studios and smaller units but it represents a significantly lower amount of the overall market value of the building. The portion of the total market value of the building sold is more important than the number of units and that is what gives the green light.

Define 'SOLD'. When that Russian steel dude bought his own penthouse for $10 million at the Trump tower is that really a sale? How about the mysterious Asian buyer for $20 million on Bloor?

So much is hype and like TOareaFan wrote, when you got so many flippers the banks get nervous. It is bad karma people! Investing is ok but the flippers are destroying good projects!

 

[Observer Walt]

TOareafan, thanks for a good concise description of the process.

Word which has been floating around for several months now is that some projects have run into financing obstacles, with some lenders (not Canadian) apparently having second thoughts. Some renegotiations have taken place. As I understand it, the problems have related less to the projects themselves, and more to the fact that the funding process itself isn't working as well as it did before (the "gridlock" being referred to in the media).

Most if not all projects in Toronto which are either under construction or well advanced in the sales process will go ahead. There are far fewer "flippers" than some would want you to believe. Some mistakenly believe that an "investor" is equivalent to a "flipper".

Having said that, there will be some projects in the pre-planning stages that will not come to market soon. The market has slowed considerably. Some sites will remain as parking lots for a while longer.

 

[TOareaFan]

TOareafan, thanks for a good concise description of the process.

Word which has been floating around for several months now is that some projects have run into financing obstacles, with some lenders (not Canadian) apparently having second thoughts. Some renegotiations have taken place. As I understand it, the problems have related less to the projects themselves, and more to the fact that the funding process itself isn't working as well as it did before (the "gridlock" being referred to in the media).

Most if not all projects in Toronto which are either under construction or well advanced in the sales process will go ahead. There are far fewer "flippers" than some would want you to believe. Some mistakenly believe that an "investor" is equivalent to a "flipper".

Having said that, there will be some projects in the pre-planning stages that will not come to market soon. The market has slowed considerably. Some sites will remain as parking lots for a while longer.

I think the next 12 - 18 months will be a pretty crucial time for the Toronto condo market.......as you noted there are a lot of projects underway that will complete and "deliver" during that time frame.....if the closing to sales ratio is very low, then I believe some planned projects will be shelved.....it is very difficult (no matter what the economy is like) to market units in a building 36 months away if there is a large amount of completed units on the market and available.

 

[299 bloor call control.]

Define 'SOLD'. When that Russian steel dude bought his own penthouse for $10 million at the Trump tower is that really a sale? How about the mysterious Asian buyer for $20 million on Bloor?

So much is hype and like TOareaFan wrote, when you got so many flippers the banks get nervous. It is bad karma people! Investing is ok but the flippers are destroying good projects!

Wouldn't these super-luxury penthouse units be the safest from the downturn, particularly in Toronto? If I had enough money for these units, I'd much rather have my money in them, when Toronto's luxury condo market is still extremely undervalued when compared to other major cities around the world. It's pretty much a guaranteed investment, compared to the stock market these days.

 

[Filip]

Shangri-La Waterview Chicago and Living Shangri-La Toronto are two completely unrelated projects aside from having licensed the same 5 star hotel.

From what I remember reading, the architect of the Waterview Shangri-La was also the developer, and paid the initial money up front, having thought he could get financing when the building was halfway up... Well markets change, the building hasn't sold somewhat well and nobody is willing to lend money to a development in Chicago riddled with uncertainties.

I doubt it'll be built in the forseeable future.

 

[TOareaFan]

Wouldn't these super-luxury penthouse units be the safest from the downturn, particularly in Toronto? If I had enough money for these units, I'd much rather have my money in them, when Toronto's luxury condo market is still extremely undervalued when compared to other major cities around the world. It's pretty much a guaranteed investment, compared to the stock market these days.

From a lender's perspective, there are two ways to look at this.

1. is the "hyper rich are always rich" approach. So if the guy bought a $10 million unit and put 20% down ($2 mil) he can and will come up with the additional $8 mil when the unit is built.

2. is the "how do we know he will close and what happens if he doesn't"....you just never know the source and strength of his wealth. Look at Magna...they sold half their company (essentially) to a russian billionaire for what $500 mil or so.....the guy put down a $20 mil deposit....turns out he borrowed that deposit, can't close and now Magna has a foreign bank as a partner/investor (they lent him the entire $20 mil)...so back to condos....your Russian purchaser may have borrowed that $2 million.....he may not be able to close....you get a unit handed back to you....yes you have his money but you are still left with an $8 million problem....in a spiral down market (which is what you might be facing) how deep is the market for $8 million condos (in any market?).......let's look at the alternative for the reason that lenders prefer to lend to blue collar, mid-market condo developments......assume units of $500k each.....$10 million of revenue comes from 20 units.....to create that same $8 million revenue hole....20 individual buyers would all, independantly, have to reach the same "I can't/won't close" decsion.....not that it can't happen....it is just less likely.....spreading the risk a bit......what was it your mother told you "don't put all your eggs in one basket"....everything you wanted to know about lending you learnt in Kindergartent!!!

 

[torontofcfan]

All lenders/banks have their own criteria as to how they deceide to underwrite a mortgage, I think they go on hard actual number, especially in these uncertain times. Feelings and sentiments are not a strong enough compultion to fund a deal. They would not be able to justify their position to their shareholders/investors under these circumstances. Especially if a project went in the red.

Right now I think regardless of the amount of deposits, it is not enough to justify breaking ground. I think a bank would want to wait a few months to see what happens in markets, because if real estate values dip near the value the deposits people are going to walk. (lets not forget about closing costs)

I agree that all the projects will likely move ahead in the coming five to six months, however right now all the projects that do not have a shovel in the ground are taking the 'wait and see' approach.

 

[TOareaFan]

All lenders/banks have their own criteria as to how they deceide to underwrite a mortgage,

True....but there are remarkable similarities on how we do it.....we may have differing risk tolerances but the mechanics behind the process are the same (ie. one lender will be comfortable lending 85% of cost while another only will do 75% of cost.....for a cash rich developer they may take the 75% loan as it is usually cheaper {less risk = lower interest rate/fees} while a developer that is tighter on cash {or has many projects on the go} will opt for the 85% loan and build higher debt cost into their budget).

I think they go on hard actual number, especially in these uncertain times. Feelings and sentiments are not a strong enough compultion to fund a deal. They would not be able to justify their position to their shareholders/investors under these circumstances. Especially if a project went in the red.

We always go on hard numbers....we are feelings and sentiment free....after all, we are cold/heartless bankers. That being said, the risk is that the only real "hard" number we have is pre-sales.....and those (as others have pointed out) are only supported with deposits.....if the world turns upside down, those deposits might not turn into closings....it is a risk that our industry has to deal with and has for a long time.

Right now I think regardless of the amount of deposits, it is not enough to justify breaking ground. I think a bank would want to wait a few months to see what happens in markets, because if real estate values dip near the value the deposits people are going to walk. (lets not forget about closing costs)

Not quite true....as far as I know, there has only been one project so far in Canada with significant pre-sales (close to 100%) where the developer has chosen not go forward. Now, what they are going to do with that big hole in the middle of downtown Calgary I do not know.

If a project is pre-sold, has costs mostly fixed and has their financing in place....the project will go ahead......that is just the way it works.

I agree that all the projects will likely move ahead in the coming five to six months, however right now all the projects that do not have a shovel in the ground are taking the 'wait and see' approach.

That is a bit of a sweeping generalization....there are projects that I am aware of that do not have shovels in the ground but are going through their normal "stuff" and I have no doubt they will go ahead.

On another matter, are you looking forward to Saturday's match?

 

[Quanttrader]

The correction was coming naturally due to the massive oversupply. But the credit crunch has accelerated it. Who says prices can't fall precipitously? Not my pals at the other end of the trading floor who saw oil drop 50% in less than 6 months! Guess who is buying all these pre-sales? Middle Eastern oil money!

Bottom line is speculators get burned bad and we got more in TO than anywhere in this country. Ain't looking pretty folks. Dump your deposits at 50 cents if you can and stuff that money in your piggy bank.

 

[BobBob]

I know tons of people who've bought condos and tons more who'd like to, and all of them work in Toronto for average salaries. Most of my neighbours in my condo building are owners, and also work here in Toronto. You also compare housing to oil... I don't think much needs to be said there. Oil is a commodity.

 

[Quanttrader]

I know tons of people who've bought condos and tons more who'd like to, and all of them work in Toronto for average salaries. Most of my neighbours in my condo building are owners, and also work here in Toronto. You also compare housing to oil... I don't think much needs to be said there. Oil is a commodity.

So are condos pal. That's why we're in a whole whack of trouble!

With average condos costing $400 x 750 square feet or $300,000 how is an average salaried worker able to afford one anymore? Not talking about your personal experience, I'm talking about the whole market. My pals at the other end of my office floor will tell you how crazy things got in the last few years. Big trouble ahead.

 

[Archivist]

The Globe has an article this morning about a condo project in Surrey, BC, on which the current credit mess has halted construction. It is called "Infinity" (side note: please let this be foreshadowing ...). What is shocking to me is that two towers have been poured to the 22nd floor, and glass installed to the 15th or so, I would have thought that by the time a building gets that far along, it would be completed without problem.

I'm sure it will get done, but it needs to be refinanced so it could be tricky. They say it could be sold, or that another developer will step in.

Quanttrader, I think we are in some trouble, but frankly Toronto seems to be much stronger as a market to date than any US city and stronger than many Canadian cities, in terms of market activity. No one, I think, knows what yet is to come.

 

[TOareaFan]

The Globe has an article this morning about a condo project in Surrey, BC, on which the current credit mess has halted construction. It is called "Infinity" (side note: please let this be foreshadowing ...). What is shocking to me is that two towers have been poured to the 22nd floor, and glass installed to the 15th or so, I would have thought that by the time a building gets that far along, it would be completed without problem.

I'm sure it will get done, but it needs to be refinanced so it could be tricky. They say it could be sold, or that another developer will step in.

Quanttrader, I think we are in some trouble, but frankly Toronto seems to be much stronger as a market to date than any US city and stronger than many Canadian cities, in terms of market activity. No one, I think, knows what yet is to come.

From what I have heard the problems with Infinity relate to their source of funding.......Lehman Brothers had a division that was providing financing (part loan part equity) to condo developers. You don't have to have paid too much attention to the news to know what has happened to them.

Lehman also financed a couple/few developments in Toronto.....as far as I know those are further along (if not completed already) but I can't say for sure if this is an issue in this market.