GST Removal Boosts Economics of Residential Rental Development
Event
The Federal government yesterday announced (link, link) its intention to introduce legislation to remove the federal 5% GST from construction of new purpose-built rental housing, including student and seniors' housing. The government also called on all provinces to follow suit with the elimination of the PST portion of the tax. Ontario (13% total tax rate) and Newfoundland (15%) have already indicated that they will eliminate the tax, while BC already does not charge PST. The initiative applies to projects commencing construction now through December 31, 2030.
Impact: SLIGHTLY POSITIVE
Removal of the GST/HST on residential rental construction was one of the 10 recommendations put forth in the recent National Housing Accord report, and it should benefit those entities with larger development pipelines/opportunities. This announcement benefits a wide swath of our coverage universe, but most notably those with the largest development pipelines: the retail-focused REITs, Dream Unlimited, and Dream Impact Trust. Our December 2022 report (link) estimated that Canada's listed Real Estate sector had over 13,000 medium-/ high-density residential units under construction and capacity for at least an additional 230,000 units of future development potential. The exhibit below from that report is already out-of-date, with several REITs adding more large-scale projects to their potential future pipelines.
Looking at the flow-through economic benefit of the legislation. Using Ontario as an example, we believe the savings could amount to 6-7% of total costs (net of existing HST rebates). Assuming an initial 5% development yield target, this would add 25-40bps to the yield. We believe this is sufficient to make the economics work on some (but certainly not all) existing planned projects, and in turn potentially drive a meaningful increase in new purpose- built rental supply over time.
Rising interest rates have rendered uneconomical a majority of purpose-built rental projects in most Canadian markets, causing many REITs (and private participants) to pause all new construction starts. The removal of GST (and PST in at least some provinces) should allow some projects to be green-lit, in our view, thereby allowing the value of these assets to be realized or monetized more quickly.