THE MARKET
Chinese stoke Toronto’s condo boom
TERRENCE BELFORD
Toronto— From Friday's Globe and Mail
Published Thursday, Nov. 11, 2010 10:41AM EST
Last updated Thursday, Nov. 11, 2010 11:04AM EST
They have cash aplenty; they are in it for the long term, and they have taken the GTA real estate market by storm.
Chinese buyers have become by far the dominant force in the new condo market in the GTA.
Estimates of their impact suggest overseas Chinese investors, the 100,000-strong local community and the 20,000 to 25,000 Chinese citizens who are students resident in the Toronto area now account for anywhere from 25 per cent to 40 per cent of all new condos purchased here.
In high-end suburbs in Markham and Richmond Hill, Chinese buyers are snapping up $1-million plus homes in both the new and resale markets. In some prime downtown Toronto projects they account for 65 per cent of the sales during the first few crucial launch weeks when prices are lowest.
“Their impact is huge,†says Stephen Wong, president and founder of Living Realty Inc. in Markham.
His company’s 500 agents handle about 4,000 resales a year plus 2.500 new homes. “Our view is that today Chinese investors account for 40- to 45 per cent of all new condo sales,†says Mr. Wong.
“The fact is, they love Toronto. They see a stable, steadily growing residential market in a country with a stable economy and political structure. As long as we can create projects in great locations at reasonable prices, they will keep buying in great numbers.â€
Their clout has even reached into luxury new and resale homes in areas where there is a concentration of Chinese residents, says T.C. Chan, president of Tradeworld Realty Inc. His company has 200 agents and a strong focus on Asian investors.
“Where I live in Richmond Hill and in parts of Markham, 60 per cent of luxury resales – homes selling for $1.3-million plus – are going to Chinese,†he says. “We have homes where buyers use them just twice a year when they visit Canada, yet they maintain gardeners, cleaning staff year round.
“I have seen launch days at projects like Angus Glen when they release a new series of luxury homes and expect maybe three or four people to buy over the weekend but instead 20 Chinese families snap them up.â€
The importance of Chinese investors is shown in the fact that there are six major brokerages now specializing in the trade and about 10 Chinese publications in the GTA dedicated to the real estate market, says Mr. Wong.
There is even a professional organization: The Chinese Real Estate Professional Society of Ontario.
The extraordinary interest from Chinese buyers begs a number of questions. Where are they coming from? Why are they buying in Toronto? And is the surge of investor-owned condos a good thing?
Last question first: While many people who buy a condo for their own use might feel uncomfortable living in a building where a large number of suites are occupied by short-term renters, without investor-owned suites the GTA would have virtually no rental stock available.
Experts like Barry Lyon of N. Barry Lyon Consulting Ltd. point out that, because of rent controls, about 98 per cent of new rental suites have come from investor-owned condos. Just two years ago when prices for new suites reached the stage where they made little economic sense as a rental unit, investors fled the market.
The concern then was that the GTA would face a shortage of rental suites and rents for what was available would shoot up as vacancy rates dropped. This fall, however, builders managed to cut selling prices at newly launched projects simply by reducing the size of suites.
The cost per square foot remained the same, but the price per suite was down by about 10 per cent. Once again investors could plunk 20 per cent down and see enough in rent to cover mortgage and maintenance payments with a reasonable return.
“Smart Chinese investors can get 4 per cent a year return on a rental plus a significant return on built-up equity and the natural rise in real estate prices when they sell down the line,†says Mr. Wong.
“They are mainly long-term investors. Some will flip at higher post-construction prices, but in the main they like to buy and hold.â€
Where are they coming from? Since 2000 there has been steadily growing interest from mainland China, but buyers are also based in Singapore, Hong Kong, Malaysia – indeed any place where there is a prosperous overseas Chinese community, says Tony Ma, a broker with HomeLife Landmark Realty Inc. in Markham.
“Almost all of them have a relative or close friend in the GTA,†adds Mr. Wong. “That relative or friend buys and tells them about the opportunity and they invest here as well or buy for their children attending school or in the hope that they will eventually move here themselves.â€
All three men say Chinese are not the only ethnic buyers driving the new condo market. East Asians, immigrants from the former Soviet Union and Koreans all have sizeable representation. Indeed local investors are in the minority.
Mainland Chinese investment has been spurred by Chinese government policy, they explain. Before the middle of this decade, there were no restrictions on Chinese investing in residential real estate in their home country.
“In the old days you would see people buying 10 suites in a new project in cities like Shanghai and Beijing,†says Mr. Ma.
Today, however, rules say Chinese must put 30 per cent down on their first residential purchase and 50 per cent down if they want to buy a second and hope to get mortgage financing. After that, residential purchases are all cash transactions.
The size of new suites in China – on average, about 350 square feet – is a factor as well. Nor are there any longer restrictions on taking money out of China. The days of a $20,000 cap disappeared as China began its move towards a market economy. Fortunes were being made in China and overseas investment was seen as a smart economic move.
“Here they can buy suites double that size and up and as many as they like as long as they can meet bank financing requirements,†says Mr. Chan. The only caveat is that most builders will not sell any one investor more than two suites in a single building.
Granted, Chinese investment enthusiasm does not extend to all projects and to all areas of the GTA. Their primary focus is new launches in areas served by the subway or in pockets with a high renter concentration.
That means downtown Toronto, the Yonge Street strip or along the stretch of Sheppard Avenue West served by the subway.
The three most important factors for them are location, price and design, says Mr. Chan. Design has to follow the principles of feng shui.
“They don’t like odd corners; they like high ceilings and lots of light and are concerned about placement of doors,†says Mr. Chan. “They often avoid resales because they want to make sure nobody died in the home,†adds Mr. Ma.
Within that flood tide of investors are specific sub-groups. While for many price is the determining factors – the lower the better – which means a preference for one bedroom suite and one bedroom and den suites. There are also those whose focus is on two-bedroom units.
Again, however, the smaller the better because size determines price.
“We have a large number of clients who want family suites,†says Mr. Wong. “That means small two-bedroom units and we are seeing junior two-bedrooms now at 700 square feet or so.
Square footage only comes into play when determining price. They want to be able to rent two-bedroom family suites and when you advertise them you say two-bedroom, not how big they are.â€
Finally is the surge likely to continue? All three experts say yes – if immigration to the GTA continues at the 100,000 a year mark and if builders can continue to supply affordable product in neighbourhoods of high rental demand.
“Chinese investors are leery of the stock market but they do understand real estate,†says Mr. Wong.
“And as long as we can continue to provide product they will want to buy here either as investments or for their family use.â€
