Andrea Hop­kins, Reuters

Five months after buy­ing one of Toronto’s new lux­ury hotel con­do­mini­ums, Oliver Baumeis­ter is gird­ing for a glut of suites like his to hit the mar­ket as the biggest names in the hotel busi­ness open hun­dreds of units in Canada’s largest city.

Baumeis­ter, him­self a real estate agent, is in no rush to sell. When Toronto’s untested mar­ket for five-star condo liv­ing absorbs the sur­plus — say by 2016 — he intends to offload his sky-high unit for a tidy 20% profit, and look for his next Cana­dian real estate investment.

“A bunch of it will sit for a while and it will take time to sell,” said Baumeis­ter, who has been buy­ing Toronto con­do­mini­ums with his brother for the past four years.

“But we bought it with the belief that the Toronto hotel condo mar­ket def­i­nitely has a future. When we sell, hope­fully … we’ll see about a 20% profit.”

The model of ultra-fine con­dos attached to lux­ury hotels isn’t new — cities like Hong Kong and New York are full of them.

But Toronto, a rel­a­tively small city with no five-star hotel con­do­mini­ums a year ago, is com­ing to the game late but with a vengeance.

By the end of this sum­mer Toronto will have four such projects, as Four Sea­sons, Ritz Carl­ton, Trump and Shangri-La open mas­sive tow­ers in a city where a red-hot mar­ket for all types of hous­ing has brought ris­ing con­cern about a real estate bubble.

The granite-and-glass tow­ers, includ­ing two of Canada’s tallest res­i­den­tial build­ings, are open­ing in quick suc­ces­sion, adding hun­dreds of hotel rooms and more than a thou­sand con­do­mini­ums just as Cana­dian hous­ing hype hits a fever pitch.

Com­ment: And hype is exactly that – hype. Chuck D told us not to believe it, he was right.

Signs of suc­cess are mixed. None of the four projects, whose con­dos cost from just under $1-million to $28-million, has sold out, and the push by devel­op­ers to sell their remain­ing units before a resale mar­ket kicks in has the feel of a tick­ing time bomb.

Com­ment: What push? They all want to sell their units, as with any devel­op­ment regard­less of cost. Trump has been sell­ing for almost 10 years now, of course they want to be done.

“I think any devel­oper has con­cerns about that,” said Howard Tikka, direc­tor of mar­ket­ing Talon Inter­na­tional Devel­op­ment Inc, which is devel­op­ing the Trump property.

“If you have units left to sell, and peo­ple are tak­ing them to mar­ket to resell, there is just not a whole lot you can do about it.”

With the Ritz Carl­ton already open and the other three not-fully-sold projects due to hit the mar­ket this sum­mer, the devel­op­ers will com­pete with sell­ers of their own lux­ury con­dos as spec­u­la­tors and investors try to cash in.

Com­ment: ASSUMED spec­u­la­tors and investors. Some may have just changed their mind, oth­ers may need to liq­ui­date for finan­cial rea­sons. We have no idea how many will come up for sale, nor the rea­sons why.

While all four projects boast paper prof­its for early investors, the simul­ta­ne­ous sale of dozens — per­haps hun­dreds — of exquis­ite suites may prove too much of a good thing.

“I think on the lux­ury side, the mar­ket has already peaked,” said Don Camp­bell, pres­i­dent of the Real Estate Invest­ment Net­work, an author who invests his own money and advises oth­ers about buy­ing into Canada’s hous­ing market.

Camp­bell said six groups iden­ti­fied the same hole in Toronto’s lux­ury mar­ket about 10 years ago. Four projects went ahead, and all of them are com­ing on line at the same time.

Com­ment: But the true mea­sure of this mar­ket seg­ment is not what hap­pens in a few months – it is what hap­pens over the next decade, or more. Any time you have mul­ti­ple instances of the same thing com­ing on line at the same time there can be issues. Just wait it out and things will settle.

TROUBLES AT TRUMP

The Trump project, a 65-story paragon of glitz with a “cham­pagne and caviar” theme, appears the most trou­bled. Plagued by bad press, con­struc­tion delays, dis­grun­tled buy­ers and a hybrid model of res­i­dences and pooled hotel con­dos, the project has the largest por­tion of unsold units despite being the first to open its sales office, in 2004.

Talon said 80% of the tower’s 379 units have sold, pow­ered by the hotel con­dos, cur­rently priced from $967,000. But 40% of the res­i­den­tial con­dos, priced between $2.3-million and $6.3-million, remain unsold.

It said Trump has the most left to sell because it has twice the num­ber of units as com­peti­tors at the Four Sea­sons and Ritz Carl­ton, and focused first on sell­ing its hotel rooms.

The Ritz Carl­ton, Four Sea­sons and Shangri-La projects have kept their condo and hotel rooms sep­a­rate. The condo own­ers have access to hotel ameni­ties but no direct stake in its operation.

Trump, on the other hand, is try­ing to sell all its hotel rooms to pri­vate investors as con­dos. Own­ers can live in the suites, or put the rooms into a rental pool and take a cut of income from the hotel guests stay­ing there.

The busi­ness struc­ture means buy­ers of the pooled hotel condo units are sub­ject to com­mer­cial tax rates rather than lower res­i­den­tial rates, and the bar for financ­ing is higher.

Com­ment: Which is one of the major prob­lems they are hav­ing. No mat­ter how much money you have, when your prop­erty tax bill is 9x higher than you expected, you get mad. And some of those tax bills are $80,000 or even $100,000.

“I called every major lender regard­ing Trump, and the only one I could find that was will­ing to finance was HSBC,” said Cal­lum Ross mort­gage con­sul­tant Jason Friesen.

Com­ment: Because our banks are get­ting out of the condo/hotel game. I helped a client buy on Vic­to­ria street a few years back, in a mixed build­ing. He barely got CMHC to back him – in fact I was told that his was the last mort­gage insured for that type of project. So yeah, there is cer­tainly a prob­lem get­ting financ­ing for com­bined buildings.

“There were some units that had $20,000 (annual) prop­erty taxes for an $800,000, or 1,500 square foot, unit because it was zoned com­mer­cial. So lenders wouldn’t touch it.”

Com­ment: As I said, imag­ine the bills on the big ones!

Real estate lawyer Bob Aaron, who rep­re­sents “a hand­ful” of dis­grun­tled Trump buy­ers, said some are try­ing to get out of their con­tract or walk­ing away from $250,000 down payments.

“The monthly costs are too high, or they real­ized too late that they had over­paid, or can’t finance it, or didn’t real­ize they were get­ting into a busi­ness ven­ture super­im­posed on prop­erty own­er­ship,” he said.

Com­ment: And if no one learned from the fiasco that was 1 King West, then it is their own fault. This sort of thing was huge news, any­one with any inter­est in real estate should have known about it. And it should have prompted a lot of ques­tions that would have avoided the issues here.

“They had very smooth sophis­ti­cated mar­ket­ing, and I think buy­ers were daz­zled by being part­ners with Don­ald Trump.”

Com­ment: I don’t know about that. I had an inter­ested client years back and I had exten­sive dis­cus­sions with them. I was never daz­zled, nor were they ever duplic­i­tous. If buy­ers did not do their due dili­gence, then they have no one to blame but themselves.

The Amer­i­can prop­erty mogul has licensed the Trump name to the project but has no part in own­ing or oper­at­ing the tower.

FLIPPERS AND FOREIGN BUYERS

The debate about who is buy­ing them dogs Toronto’s condo boom. There are no fig­ures for for­eign buy­ers in Canada, which is seen as a finan­cial safe haven amid global woes, but talk of afflu­ent Asian, Euro­pean and Mid­dle East­ern investors abounds.

Com­ment: Tridel says that only 5% of their Toronto buy­ers are for­eign, a fig­ure I imag­ine to be fairly rep­re­sen­ta­tive of the mar­ket as a whole. And the Asso­ci­a­tion of Con­do­minium Man­agers says that 22% of units are rented out. So yes, there are actual fig­ures. The prob­lem is that they don’t jibe with the cat­a­stro­phe sto­ries most of the press is writing.

Jan­ice Fox, direc­tor of sales at the Four Sea­sons, esti­mates 30 to 40% of buy­ers there have been for­eign, but she said they intend to live in the units, at least part of the year.

Com­ment: The ultra-luxury mar­ket is NOT rep­re­sen­ta­tive of the Toronto condo mar­ket as a whole.

Some 90% of the Four Sea­sons 210 con­dos have been sold, includ­ing one last year for $28-million, the high­est price ever paid for a Cana­dian con­do­minium. That buyer is for­eign, but the fam­ily intends to move to Toronto, Fox said.

The resale mar­ket may be a gold mine for early buy­ers, as some prices have dou­bled since the first investors signed on in 2004 or 2007.

Com­ment: Most Toronto prop­er­ties have dou­bled since 2004, new or resale.

“There’s been a big gain in price. There’s prob­a­bly a small group who bought in 2007 who has had a mas­sive gain and want to cash out on that,” said Michael Braun, mar­ket­ing man­ager for Shangri-La devel­oper West­bank Corp.

With more than 50 of 393 units remain­ing to be sold before August, when con­tracts close and buy­ers can start re-selling, Braun says it could take until early 2014 before Shangri-La sells all of its units.

Real­tors esti­mate between 10% and 20% of pre-construction sales are made by investors who intend to flip the units as soon as the deals close.

Com­ment: Which Real­tors are those? Funny you don’t quote any of them…

The Ritz Carl­ton, open since mid-2011, is a cau­tion­ary tale of the risk of resale. More than 90% of its 159 units have been sold — but nearly two dozen are back on the resale mar­ket, dilut­ing the sales power of the developer.

“I think the val­ues have been hurt at the Ritz, where you’ve had some pow­ers of sale,” said real estate agent Brian Per­saud, refer­ring to forced sales due to mort­gage default. “That’s going to harm the value, definitely.”

Com­ment: Peo­ple for­get that these lux­ury projects are the first ones in Toronto. And they all started around the same time and fin­ished around the same time. After this ini­tial buzz, things will slow down. Any new ultra lux­ury projects will be sin­gle events.

As the sum­mer open­ings of the three other projects approach, devel­op­ers and investors seem to have one eye on the clock and one eye on his­tor­i­cally low inter­est rates, des­per­ate to sell before the talk of a burst­ing Toronto condo bub­ble comes true.

Com­ment: THERE IS NO BUBBLE.

“There has to be a cor­rec­tion — but hope­fully not within a year …. it is scary,” said a Toronto banker who bought one of the Shangri-La lux­ury units in 2007 and hopes to resell at a 15% profit as soon as he can.

Com­ment: No, there does not HAVE to be a correction.

“Obvi­ously there is going to be a spiral-down effect (when all the units hit the mar­ket) but that is to be expected,” said the banker, who bought the unit with his par­ents and declined to be named to pro­tect their pri­vacy. “At worst we’ll break even.”

Com­ment: So this buyer is look­ing to make 15% and the one above is expect­ing 20%. Why does this not sound so bad?

Real estate agent Per­saud is more san­guine. He believes all the lux­ury con­dos will be sold, espe­cially once resale val­ues sta­bi­lize and buy­ers can get a first-hand look at the fin­ished five-star product.

“I don’t think they’ll be vacant for­ever,” he said. “Even­tu­ally the mar­ket will catch up to it, but there is going to be blood in the streets for a while.”

Com­ment: That is a dra­matic way to say it, but yes…

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Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
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financ­ing shangrila

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