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Understanding and investing in commercial real estate

by Richard Crenian

Too often you hear a phrase that is commonly used and you have a rough idea what it means without fully grasping its proper definition. For many, commercial real estate may be one that is widely talked about but not always understood.

In fact, it is an umbrella term that covers many categories of real estate. So let’s move away from the headlines and look at how commercial real estate can be part of your investment strategy.

To do this, we will break it down to four different categories.

The regional mall

At the top of the pyramid is the regional retail mall, often sprawling in size. Think of major landmarks, like the CF Toronto Eaton Centre or West Edmonton Mall.

These are tourist attractions in themselves that have high value and often operate as a large entity or corporation.

While Canada has some of the most commercially successful malls in the global market, growth in this area has been curtailed by land development limitations. Since 1989, only two major shopping malls have been built in Canada: Vaughan Mills in Toronto and CrossIron Mills in Calgary.

Power centres

Power centres have taken hold in the Canadian market since the late 1980s in the form of unenclosed stand-alone “big box” stores such as Staples and Walmart. Despite economic challenges, tenancy increased from 8,627 in 2006 to 12,086 in 2010 – a rise of just over 40 per cent.

Today, we’ve noticing a tremendous upsurge in power centres. The number of locations in Ontario have nearly doubled and across the country we are seeing a widening of the services available (from banking to fashion).

Community malls

Unlike regional malls, community malls are losing significant ground in the retail landscape and are struggling to keep up.

Analysts still believe there is a market for Tier 2 malls if there is a commitment to redesign or if the property is being sold for other purposes.

Neighbourhood retail

Small retail areas anchored in well-established residential areas and mature communities make up what is known as neighbourhood retail. Here, you often find local food stores, coffee shops and hair salons.

And that’s exactly why, this type of retail tend to perform better than others in the long term – it’s based on services and products consumers will still purchase even when there is economic downturn.

Investing in retail centres

For family trusts and other investors, neighbourhood retail is an effective way to diversify an investment portfolio. The returns are good and the risks are relatively low.

Last year, the national vacancy rate was about 4.8 per cent. In comparison, neighbourhood retail areas were averaging about 2.6% vacancy rates.

Similarly, overall sales tend to stay steady during economic bumps, catering to the local neighbourhood needs. The more mature the neighbourhood, the more likely there will be low vacancy rates and increasing growth.

Don’t bequeath a fight: How you can leave a fair will

by CBC News

Canada’s aging population is leaving behind a lot of money. And, if the transition of wealth through wills isn’t managed properly, things can get ugly.

According to a 2016 CIBC report, Canadians between 50 and 75 years old are set to inherit $750 billion over the next decade, the largest intergenerational wealth transfer in Canadian history.

  • Baby boomers under 75 set to inherit $750B in next decade, CIBC says

But not all of the transitions will go smoothly, according to Vancouver trust lawyer Nick Smith.

“It’s obviously very emotional for those involved, and there can be some discord associated with the decisions that have to be made,” he told host Gloria Macarenko on CBC’s BC Almanac.

He shared some tips on how families can limit the amount of disputes.

1. Don’t leave it up to anyone else

The first step to having a fair will is drawing one up in the first place. According to a 2014 report from B.C. Notaries, just over half of British Columbians have a written will.

If you die without writing a will, your assets and estate will be divided according to the Wills, Estates and Succession Act.

While the act still prioritizes the transfer of wealth to spouses and children, it will prove to be a far more expensive alternative to a traditional will once assets are divided, according to The Canadian Bar Association of B.C.

Staying on top of your will enables you to divide it how you see fit, and reduce costs — and stress —on your loved ones, says Smith.

2. Communication is key

Smith says petty rivalries between children can crop up during will readings. Some children will feel entitled to a larger inheritance because they believe they received less support than their siblings when they were growing up.

“It could be something as trivial as the parent paid for the university of the younger child but not the older child, and that could be because they didn’t have the money,” he said.

Smith admits parents aren’t perfect, and sometimes they afford one children more opportunity, despite their best intentions. In these cases, he says its important for parents to have a discussion with their children that can help to clear the air surrounding any perceived forms of favouritism, leading to a more balanced will.

3. Choose executor carefully

The executor of the will is the person tasked with carrying out the instructions of the will. Their tasks include completing an inventory of all assets and estates, paying off all the deceased’s debts, and dispersing what’s left to all beneficiaries.

Usually, friends or close relatives are assigned the role.

Oftentimes, it’s a child that is chosen as an executor — but this can lead to more infighting, or a perceived conflict of interest from other siblings.

If your family might not be agreeable when it comes to dividing assets, Smith suggests assigning an independent executor.

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Four major changes to Canada’s housing rules

by Bill Curry

The Liberal government has announced sweeping changes aimed at ensuring Canadians aren’t taking on bigger mortgages than they can afford in an era of historically low interest rates.

The changes are also meant to address concerns related to foreign buyers who buy and flip Canadian homes.

Below is a breakdown of the four major changes Finance Minister Bill Morneau announced Monday.

The current rules

Buyers with a down payment of at least 5 per cent of the purchase price but less than 20 per cent must be backed by mortgage insurance. This protects the lender in the event that the home buyer defaults. These loans are known as “high loan-to-value” or “high ratio” mortgages.

In situations in which the buyer has 20 per cent or more for a down payment, the lender or borrower could obtain “low-ratio” insurance that covers 100 per cent of the loan in the event of a default.

Mortgage insurance in Canada is backed by the federal government through the Canada Mortgage and Housing Corp. Insurance is sold by the CMHC and two private insurers, Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Company. The federal government backs the insurance offered by the two private-sector firms, subject to a 10-per-cent deductible.

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The change

Expanding a mortgage rate stress test to all insured mortgages.

What it is

As of Oct. 17, a stress test used for approving high-ratio mortgages will be applied to all new insured mortgages – including those where the buyer has more than 20 per cent for a down payment. The stress test is aimed at assuring the lender that the home buyer could still afford the mortgage if interest rates were to rise. The home buyer would need to qualify for a loan at the negotiated rate in the mortgage contract, but also at the Bank of Canada’s five-year fixed posted mortgage rate, which is an average of the posted rates of the big six banks in Canada. This rate is usually higher than what buyers can negotiate. As of Sept. 28, the posted rate was 4.64 per cent.

Other aspects of the stress test require that the home buyer will be spending no more than 39 per cent of income on home-carrying costs like mortgage payments, heat and taxes. Another measure called total debt service includes all other debt payments and the TDS ratio must not exceed 44 per cent.

Who it affects

This measure affects home buyers who have at least 20 per cent for a down payment but are seeking a mortgage that may stretch them too thin if interest rates were to rise. It also affects lenders seeking to buy government-backed insurance for low-ratio mortgages.

Why

The government is responding to concerns that sharp rises in house prices in cities like Toronto and Vancouver could increase the risk of defaults in the future should mortgage rates rise.

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The change

As of Nov. 30, the government will impose new restrictions on when it will provide insurance for low-ratio mortgages.

What it is

The new rules restrict insurance for these types of mortgages based on new criteria, including that the amortization period must be 25 years or less, the purchase price is less than $1-million, the buyer has a credit score of 600 and the property will be owner-occupied.

Who it affects

This measure appears to be aimed at lowering the government’s exposure to residential mortgages for properties worth $1-million or more, a category of the market that has increased sharply in recent years in Vancouver and Toronto.

Why

Vancouver and Toronto are the two real estate markets that are of most concern for policy makers at all levels of government. These measures appear to be targeted at those markets.

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The change

New reporting rules for the primary residence capital gains exemption.

What it is

Currently, any financial gain from selling your primary residence is tax-free and does not have to be reported as income. As of this tax year, the capital gains tax is still waived, but the sale of the primary residence must be reported at tax time to the Canada Revenue Agency.

Who it affects

Everyone who sells their primary residence will have a new obligation to report the sale to the CRA, however the change is aimed at preventing foreign buyers who buy and sell homes from claiming a primary residence tax exemption for which they are not entitled.

Why

While officials say more data are needed, Ottawa is responding to extensive anecdotal evidence and media reports showing foreign investors are flipping homes in Canada and falsely claiming the primary residence exemption.

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The change

The government is launching consultations on lender risk sharing.

What it is

Currently, the federal government is on the hook to cover the cost of 100 per cent of an insured mortgage in the event of a default. The federal government says this is “unique” internationally and that it will be releasing a public consultation paper shortly on a proposal to have lenders, such as banks, take on some of that risk. The Department of Finance Canada acknowledges this would be “a significant structural change to Canada’s housing finance system.”

Who it affects

Mortgage lenders, such as banks, would have to take on added risk. This could potentially lead to higher mortgage rates for home buyers.

Why

The federal government wants to limit its financial obligations in the event of widespread mortgage defaults. It also wants to encourage prudent lending practices.

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Five previous federal housing moves since 2008

Monday’s package of announcements is the sixth time since the onset of the 2008 financial crisis that Ottawa has taken policy action in response to concerns about Canada’s housing market.

July, 2008: After briefly allowing the CMHC to insure high-ratio mortgages with a 40-year amortization period, then Conservative finance minister Jim Flaherty moved to tighten those rules by reducing the maximum length of an insured high-ratio mortgage to 35 years.

February, 2010: Responding to concern that some Canadians were borrowing too much against the rising value of their homes, the government lowered the maximum amount Canadians could borrow in refinancing their mortgages to 90 per cent of a home’s value, down from 95 per cent. The move also set a new 20-per-cent down payment requirement for government-backed mortgage insurance on properties purchased for speculation by an owner who does not live in the property.

January, 2011: The Conservative government under Stephen Harper tightened the rules further, dropping the maximum amortization period for a high-ratio insured mortgage to 30 years. The maximum amount Canadians could borrow via refinancing was further lowered to 85 per cent.

June, 2012: A third round of tightening brought the maximum amortization period down to 25 years for high-ratio insured mortgages. A new stress test was also introduced to ensure that debt costs are no more than 44 per cent of income for lenders seeking a high-ratio mortgage. Refinancing rules were also tightened for a third time, setting a new maximum loan of 80 per cent of a property’s value. Another new measure limited the availability of government-backed insured high-ratio mortgages to homes valued at less than $1-million.

December, 2015: The recently elected Liberal government moved to tighten lending rules for homes worth more than $500,000, saying it was focused on “pockets of risk” in the housing sector.

The package of measures included doubling the minimum down payment for insured high-ratio mortgages to 10 per cent from 5 per cent for the portion of a home’s value from $500,000 to $1-million.

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