Brexit could jack up T.O. house prices
Result making London look riskier for foreign real estate clients, could fuel price spike
Realtors in Toronto and Vancouver are pitching Canadian cities as relatively safe property havens now that London, for years one of the world’s leading targets of foreign capital, suddenly looks a lot riskier. Blame it on Brexit. “Brexit’s good for us, not for them,” said Anita Springate-Renaud, owner of Engel & Volkers’ brokerage in Toronto, who expects to field calls from clients seeking to redirect their investments. “We are a safe bet.”
If Springate-Renaud is right, there may be heightened demand from affluent clients for homes and condos, as well as office towers in two of Canada’s hottest real estate markets, which already have seen prices soar from an influx of foreign money. There’s a record $443 billion (U.S.) in global capital allocated to commercial property that wealthy investors haven’t deployed, according to figures from Cushman & Wakefield.
Within hours of the stunning Brexit outcome, Brian Kriter, an executive managing director of valuation and advisory at Cushman & Wakefield, was on a 6:30 a.m. call from his home in Toronto to discuss the potential ramifications of the referendum with colleagues in London and New York.
In the days since, Kriter has met with one Asian commercial real estate lender who decided to freeze plans for a multimillion-dollar financing deal in London and is considering channelling that money to North America instead. Cushman & Wakefield is organizing a client day in July, potentially in New York, to discuss the early implications of Brexit’s fallout. “You have this phenomenal amount of capital that’s looking to be placed in commercial real estate, and it’s very fluid,” said Kriter. “Foreign investors view Canada as an island of certainty.”
In the last decade, central London saw the biggest increase in residential property prices of any major city as the favoured destination for global capital seeking a stable sanctuary.
Nearly three out of every four newly built homes in 2013 were bought by foreign buyers, half of them from Asia, according to Knight Frank. Similarly on the commercial side, 70 per cent of central London purchases were by foreigners in 2015.
The U.K.’s decision to leave the European Union may not necessarily change that overnight. The pound’s record plunge could attract buyers seeking a bargain, said Brad Hen- derson, chief executive officer of Sotheby’s International Realty in Canada. The vote may ironically bring more predictability to the U.K., but export uncertainty to the rest of Europe, said Kriter.
But with China among Asia’s most vulnerable economies to Brexit risk, there could be an even greater appetite from mainland buyers for North American assets, such as Anbang Insurance Group, which has snapped up multimillion-dollar assets in New York, Toronto and Vancouver.
A record $18.3 billion flowed out of China globally in 2014 and nearly half of that went to just three markets: London, Manhattan and Sydney, according to a March report from Colliers International Group, the Toronto-based real estate firm.
As some markets take steps to temper demand from overseas investors, Canada has increasingly become a beneficiary. Australia’s three largest states by population have an- nounced an extra duty on foreign buyers of as much as 7 per cent.
In the six months to February, foreign investment into Canadian commercial real estate surged to $1.4 billion, more than double a year earlier, the brokerage said in a separate March report. Of that, 42 per cent came from China, compared with just 5 per cent in the previous period.
Royal LePage is advising clients that Brexit is likely to cause the Bank of Canada to hold interest rates lower for longer, which will stoke demand in the residential market, said Adil Dinani, a Vancouver agent for the unit of Brookfield Real Estate Services Inc.
Any additional trickle of demand into Vancouver and Toronto could prove a headache for Canadian policy-makers seeking to dampen record high home prices. In recent weeks, the International Monetary Fund, Organization of Economic Cooperation and Development and Bank of Canada have all flagged the increasing risk of a potential correction.
“It’s something we’re going to have to talk about because there are concerns about overheating,” said Royal LePage’s Dinani. “We’ll likely see more capital inflows into these cities, so what is that going to look like? Are there going to be policy tools put in place to protect the market from further increases?”
In Vancouver, the price of a detached home rose 37 per cent in the past year to $1.5 million. In Toronto, the average price of a detached property rose 19 per cent.
“We’re in early days — it’s hard to sift through how the variables are going to play out,” said Sotheby’s Henderson. “But capital will look for more attractive, stable markets. And Canada is still very much a bargain.”