Ottawa Investment Properties and the Dash-For-Cash.

A viewer to our investment movie which summarized information to the end of the first quarter of 2013 wrote us an insightful analysis of his take on why Capitalization Rates are in decline and will continue to decrease.

It might be said that he is looking at more of how a macro view of the situation will impact our micro multi-unit investment climate.
What do you think?

(Viewers Comment # 1)
Hi Guys,

I don’t know why you are so surprised by the cap rate compression and the rising valuations. I have repeated this many times. Cap rates will drop in the “2% handle” within a few years.

It’s all about the search for yield in this Dash-For-Trash market.

However, it will get worse as western government will keep running larger deficits and the central banks will purchase their bonds to lower interest rates and debt service costs.

Interest rates on Ten Year Canada bonds are currently priced to yield a lousy nominal yield of 1.75%. The real yield after inflation is now close to “NEGATIVE 1%”.

Yes! You read that correctly. That makes a cap rate of 3% very attractive.

Japan’s the time bomb. There is a good 10 minute video by Kyle Bass on the topic.

Search on YouTube for:  Gaim 2013 Kyle Bass.

When, (not if) Japanese investors flee JGB’s, then expect a flight to safety into Canada bonds where bond prices could rise enough to drop the NOMINAL bond yields potentially as low as into negative territory.

At that point, you’ll need a microscope to see cap rates where Real-Estate will go into a cash market as a flight to quality and hard assets. Mortgage renewal will be the greatest risk, not rates.

(Viewer Comment # 2)
I may have jumped the gun in my explanation where I should have set the stage. There are two things at play here; low yields and inflation.

Cheaper properties are the first to react as smaller investors are able to purchase and update these with savings and less leverage.

Although cap rates for larger properties are compressing they are purchased with a larger amount of borrowed money consequently the income yield needs to be greater to account for the larger debt service cost.

Patrick’s comment: (At this point the viewer was responding to my April investment movie regarding the incredibly low cap rates of a little over 3% for two smaller buildings which recently sold, located is non-premium neighbourhoods and requiring work to be done on them)

However, assuming I’m correct, you should see stronger hands entering the larger building market going forward and buying with more equity capital and using less leverage. This will make the numbers work.

An extreme example would be an all cash market such as South America and parts of East Asia. Hopefully, we’ll never get to that point.

Patrick’s comment: (We saw the sale of a larger building that went firm in less than 2 weeks.

This is indicative of an all cash or at least more equity capital deal.  Otherwise a lending institution would have slowed the process down with CMHC involvement or Phase I Environmental Inspection and/or a Phase 2) 

Also I was personally involved in a $1.5 million transaction in which the buyer was an all cash buyer.  It too closed very quickly as the buyer basically made the offer conditional on a building inspection only, which can be done in a matter of days.  It was local money which purchased this property.

(Viewer Comment # 3)
Thank you Patrick for that awesome "boots on the ground" feedback.

Going forward, it would be interesting to keep an eye out as to the source of fund flow: domestic or foreign?

And if the later, from where?

We thank our reader for all of his very good comments and encourage even more.....

We are always watching the Multi-Unit Residential Market, and will keep you informed !