RE:Ontario Rent Controlfrom today's Financial Post.........
"Canadian Apartment Properties REIT, has some 30,000-odd apartment suites. But almost none of them will be materially impacted by the government’s extension, because almost all are already under rent control. That’s why the changes have a greater impact on the prospects for new, purpose-built developments — those intended to be owned all by one entity and designated as rental housing.
Residential vacancy rates are tight across Ontario, and that stems in large part from strong demand due to natural population growth and immigration.
The tight vacancy may also be partly the result of regulated allowable rent growth, which was a relatively low two per cent in Ontario last year, and just 1.5 per cent in 2017.
To alleviate tight vacancy, many markets are in need of new rental supply.
“In general, increased regulation such as rent controls, and new or standardized residential leases, is not stimulative to free-market new supply,” said Neil Downey, a managing director and real estate analyst at RBC Capital Markets. “So the announcement will likely cause most to at least re-evaluate their new residential rental development plans.”
Another way REITs could be impacted is by more challenging applications for above-guideline increases – a mechanism within the current rental housing framework that allows landlords to apply for higher rent increases associated with additional investments of capital.
In the past 19 years since the last change to rent control, many landlords have invested substantial amounts of capital to improve their portfolios.
To make it economic, they’ve applied for above-guidance increases in rents. So instead of 1.5 per cent for example, they’ll target 2.5 or three per cent.
Although details are limited so far, if the government gets more strict about these increases, analysts believe it will be a negative, but not one that has a huge impact on REITs.
Jonathan Kelcher at TD Securities noted that among the REITs he covers, only two have exposure to Ontario units built after 1991.
They are CAPREIT at 1.9 per cent of total units, and Killam Apartment REIT at approximately nine per cent.
“We expect the announcement to have little impact on these REITs, as we believe the buildings are already at market,” the analyst said in a research note.
However, Jeffrey Olin, chief executive at Vision Capital Corp., believes Killam is among the big losers as a result of the changes.
He noted that post-1991 units in Ontario account for 20 per cent of the value of Killam’s apartment portfolio.
“They were building at quite low returns, buying new developments at very marginal returns, and thinking maybe over time they could increase the rents,” Olin said. “Well, they can’t do that anymore.”
The portfolio manager also highlighted Interrent REIT as a potential winner, given what he labeled a unique focus in eastern Canada.
“They are actually improving the rental stock for Ontarians, and improving the quality of life,” Olin said. “In doing so, they are able to achieve higher rents.”