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Can we Beat the REITs?

April 29, 2020

The headline in the Globe and Mail’s Business Section says it all: “Analyst sees ‘once in a decade opportunity’ to buy Canadian REITs.”

Is anyone surprised?

Many tenants across Canada were unable to pay their April 1st rent. The Canadian Centre for Policy Alternatives’ report, The Rent is Due Soon, estimates a staggering 521,000 working tenant households have less than one month’s savings, with another 160,200 with only one to two months’ savings. With many losing their jobs, or suffering severe cuts to their incomes, over half a million Ontarians will probably have difficulty paying May’s rent, and June’s. And even when the emergency is over, they may find that their old employer — or their entire line of work — can no longer offer them a livelihood.

For CAPREIT, Starlight, Akelius, Timbercreek, and the other Real Estate Investment Trusts (REITs) that own over 350 rental buildings in Toronto, this crisis is not necessarily bad news.  Unlike traditional landlords, whose business depends on retaining tenants, REITs see housing as a vehicle for extracting wealth for their investors. In gentrifying neighbourhoods, that means nudging low-income tenants out the door and renovating their homes before putting them back on the market at grossly inflated rents. Once maximum rents are achieved the REIT can then sell the building and move on.

REITs are more likely than other landlords to weather rent strikes and rent freezes.  Take, for example, Akelius, a REIT I profiled last year. Akelius owns $18 Billion in assets divided among 12 “growing metropolitan cities,” including Toronto and Montreal. Over the past seven years the average return on their investments through a combination of rent increases and property sales was 11.5%, down from a 2016 peak of over 20% to last year’s 5.6% (p. 11) In Toronto, we have seen Akelius’ mixed strategy of upgrading and sales to keep returns high. Rents in Akelius’ 3,506 units rose an average of 8% over 2018 rents. In 2019, 9.7%. of Akelius’ 3,506 units were vacant with most of these in the midst of upgrading (p. 55). In 2019, perhaps because of skimpier returns than usual, Akelius sold 13 GTA properties with 664 units up for sale. Twelve of the 13 were bought by Starlight, another REIT.

Quiet before the storm

For the moment, REITs and all landlords are under orders from Premier Ford to “be flexible” and not evict tenants. But once Ontario’s Landlord and Tenant Board begins hearing eviction cases again, we can assume they will be at the front of the queue.

There is another, equally serious, risk. Smaller landlords, often family-owned businesses, can’t wait for the end of the coronavirus crisis to collect rent. They need that money to cover their operating costs or they will go under. And if they do, chances are there will be a REIT ready to pick up the property, and begin the same cycle of squeezing tenants to pay more, or pushing them out altogether.

What is to be done?

Start with eliminating vacancy de-control.  

As Toronto’s Sub-Committee on the Protection of Affordable Rental Housing can attest, investors are already using every strategy available to vacate their units — and these are tenants who have paid their rent in full. With rent arrears inevitably increasing during the coronavirus crisis, this process will only accelerate.

By tying rent control to the unit instead of the tenant, the Ontario Government could remove the incentive to evict tenants. The social benefits would be huge, and it wouldn’t cost the government a cent.

Beat the REITs at their own game.

If properties are going up for sale, why should the REITs get them? Why not us, the public?

In a 2018 blog entry I described Washington DC’s policy that gives tenants first right of refusal on any rental property for sale. In buildings where more than 50% of tenants want to convert their building to a co-op or condominium, and more than 50% have low- or moderate-incomes, the District will help tenants organize and provide technical assistance and low-interest loans to buy the building. Since then, the District Opportunity to Purchase Act has empowered the Mayor with the right to purchase buildings with five or more rental units of which 25 per cent are deemed affordable. The Mayor then has the option of assigning its right to purchase to pre-qualified developers who covenant to keep units affordable in perpetuity.

Would it cost money? Of course. But consider the alternative. The Government of Canada anticipates spending $73B in emergency wage subsidies, and that is only a short-term fix. The Canada-Ontario Housing Benefit is expected to offer valuable help to around 5,000 survivors of domestic violence and other disadvantaged groups, but these subsidies also have a downside. In a financialized rental market, where rents are tied to what the market will bear — not costs — we have seen housing allowances and other rent subsidies drive up rents.

In the long term, buying properties and turning them over to non-profits, co-ops and land trusts is the best way to control costs now and to build equity for the future. I hope the Government of Canada, CMHC, City Council, Toronto’s Housing Secretariat, and affordable housing developers will put their heads together to create an acquisitions program that start now, when we need it.

Finally, seniors and almost seniors: let’s not beggar our neighbours.

My husband and I are 64 years old. We have worked in the non-profit sector our entire lives and have no pensions, so our retirement is dependent entirely on our savings. Did we get hit by the double-whammy of a stock market crash and interest rate cuts? Absolutely, and so did many of our friends in similar circumstances.

For people like us, and for the managers of institutional pension funds, it would be tempting to turn to REITs as a way to make up our losses. But let’s not do it at the cost of driving our neighbours out of their homes.  If you have a workplace retirement plan, ask your pension manager how its real estate investments will create more affordable housing, not less. If you are on your own and trying to be an ethical investor, consider whether you want REITs in your portfolio.

Friends and colleagues: In these extra-ordinary times we are naturally focused on the immediate crisis. But we also need to think ahead and consider how our emergency responses could provide the foundation for a stronger, more resilient housing system.

What are your own ideas? The comment box awaits.


3 Comments leave one →
  1. Beata permalink
    May 4, 2020 4:42 pm

    As usual, informative and insightful analysis. Purchasing REIT owned assets for co-ops would certainly provide access to existing “affordable” stock. Thanks for another great idea!

  2. May 15, 2020 2:50 pm

    Hi Joy, this is a really important blog. I like your suggestions. I have a few ideas … But for now: did you know there is an NDP private member’s bill out there that amends legislation governing the Canada Pension Fund Investment Board Act – so that human rights implications of any investment would have to be considered. I believe that’s a first step toward making it harder for CPP to invest in REITs, and sets a good example for other pension funds.

  3. May 15, 2020 2:55 pm

    Thanks for this new information, Leilani. I had not heard about this private member’s bill. What an exciting idea!

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