Despite the challenges Toronto’s condo and rental markets have faced this past year, pre-sale condo investors have still fared better when it comes to both capital appreciation and cash flow compared to their resale counterparts.
According to a GTA Condo Investment report published by Urbanation and CIBC Economics last month, new condo prices in the Greater Toronto Area grew by 27 percent across a three-year period that ended in Q4 2020. By comparison, resale prices increased by 18 percent during the same timespan, while rental prices plateaued after enduring a 13 percent drop in 2020 as result of the pandemic.
Many of the pre-sale units that closed in 2020 were pre-sold more than three years ago, prior to a sharp rise in new condo prices in 2017. As a result, investors who locked-in prices that are now heavily discounted compared to current prices are experiencing “substantial equity accumulation,” the report explains.
Simon S. Mass, CEO of The Condo Store, expects that price appreciation on pre-sale condos will likely continue.
“At the point in time when you purchase a pre-construction unit, the pricing is based somewhat on current pricing at the time, as well as an estimate on where pricing will be in the year that the unit is ready for occupancy, typically three to five years,” said Mass.
“This has been the case for 20-plus years, so the value that buying pre-construction brings should continue for the foreseeable future,” he added.
The report found that the average GTA rental unit had an ownership carrying cost of $2,077 per month, and achieved an average of $2,140 in rent after completion, which produced a small amount of positive cash flow. Sixty-three percent of investors were reported to be in a cash flow positive or neutral position in 2020, which is higher than the 56 percent share of investors in 2017, said the report.
Pre-sale investors were found to be in a better cash flow position compared to investors who bought
resale units and rented them out in 2020 — 80 percent of the latter group were reported to be cash flow negative. More than half of new condo investors were cash flow positive by up to $600 per month, while less than 15 percent were cash flow negative by more than $400 a month.
Mass points out that this data set highlights the advantages to buying pre-construction and preferences among some consumers.
“There is something in these numbers that speaks to the consumer enjoying and gravitating towards newer, updated units, and I think the appreciation in newer inventory reflects that,” said Mass. “This is always an advantage of buying pre-construction. When it’s completed, you are getting a brand new unit.”
However, Mass notes that there are many individual factors that play into cash flow analysis, such as mortgages, which can make it difficult to pinpoint cash flow trends. When consulting with clients and newer investors, Mass explains that TCS tends to focus on long-term capital appreciation first, then month-to-month potential cash flow.
Of the types of condo units analyzed, the report notes that there is a “clear negative correlation between the size of the unit and the amount of cash flow.” Studios performed the best, but only represented six percent of the market, similar to three-bedroom residences, which had negative cash flow on average, but only accounted for two percent of rental investments.
While there has been a growing preference for larger units during the pandemic, Mass says that the small increase in demand for these types of condos won’t result in a seismic shift. Demographically speaking, Mass explains that younger renters are typically the ones to utilize smaller units, and their number will eventually rise as immigration levels increase and students return to cities and campuses post-pandemic.
A lack of immigration and post-secondary students moving to Toronto, coupled with the accelerated urban exodus to the suburbs, strangled the city’s resale condo and rental markets for most of 2020. In the later months of the year, condo sales finally began to rebound, but Toronto rent prices have yet to make a significant recovery into 2021.
Mass anticipates that there will be some unpredictability in condo sales this year as we head towards more predictable market conditions.
“I would expect some volatility in selling activity, as well as prices, as we ride out the end of the pandemic in 2021 and return to normal market conditions,” said Mass. “At that point, [I] expect the long-term trends that were in place pre-pandemic to start to normalize again as the economy returns to its proper track.”