Canada ranks last among G7 countries in housing supply per capita, and the Canada Mortgage and Housing Corporation (CMHC) estimates that Canada needs 3.5 million additional housing units by 2030 to achieve broad-market housing affordability. Purpose-built rental is one of the housing types required to achieve Canada’s housing supply aspirations. Real estate investment allocations, especially for housing, are growing among institutional and private investors. In response, the CFA Toronto Society Corporate Finance Committee hosted an event to provide Society members with insights into the economics of private purpose-built rental housing in Canada.

The event was led by a panel of experts involved in purpose-built rental housing development, construction, management, and financing. This article summarizes key takeaways from the event.

Purpose-built rental value proposition

Purpose-built rental buildings have ongoing resident needs in mind, such as larger and more usable floorplans, community and lifestyle amenities, and professional management. Purpose-built rental housing developers and managers need properties that satisfy resident demands and units that can be marketed and leased continually throughout their ownership, as lease contracts typically last for one year. This differs from condominium developers, who are most focused on the initial unit sale to the purchaser. In addition, purpose-built rental housing is professionally managed, meaning residents have security of tenure and timely responses to requests such as repairs, and typically have resident programming such as fitness classes and social events within the building.

 Land & construction costs

The cost of acquiring land to build purpose-built rental housing has eased over the past few years. The price a developer can pay for land is sensitive to hard and soft construction costs,[1] financing costs, and other overhead required to build a property. Hard construction costs have remained high due to unionized labour and elevated material costs, while soft construction costs continue to be a meaningful cost component within a development proforma. Coupling the hard and soft construction costs with current financing costs has resulted in a need for land values to decline to make projects feasible.

Equity capital

The panel discussed the difference between equity investors in purpose-built rental and condominium developments, with the main difference being the investment time horizon. Purpose-built rental investors need to have a longer-term investment horizon from land acquisition and planning through to construction, then to the lease-up and stabilization of the asset before a liquidity event, either through a takeout financing or sale. This differs from condominium investors, who presell most of the project before starting construction, making their returns less speculative, and their liquidity event occurs when the condo project delivers and unit purchasers close their transactions.

Debt capital

Real estate development is capital-intensive and typically requires debt financing within the capital stack. Debt financing is still available in today’s market despite rapidly changing conditions. Lenders prioritize sponsor experience and the quality of their track record alongside the financial feasibility of the individual project. The shift to more of a focus on sponsor quality has occurred over the past two years.

GST/HST rebates

In late 2023, the federal government announced legislation to enhance the goods and services tax (GST) and harmonized sales tax (HST) new residential rental rebate to a full 100 percent for the federal portion of the HST on new purpose-built rental housing. The Ontario government is mirroring the federal rebate portion to also provide a 100 percent rebate on the provincial portion of HST. This legislation added value to developers faced with higher borrowing costs and supports the construction of new apartment buildings, student housing, and seniors’ residences.

Further policy reforms

The panel discussed opportunity for further policy reform to support purpose-built rental housing development, including development charge waivers, ongoing property tax rebates, streamlined regulatory and approval processes, and faster approvals from CMHC.

“The Economics of Purpose-Built Rental Housing in Canada” was a well-attended event that educated CFA Toronto Society members on the financial feasibility, investment performance, and nuances of the asset class.