Metro Vancouver faces low-rise condo risk; lease agreement changes help secure native land development deals

Under the radar
A change to the lease agreements governing developments on land governed by the Indian Act promises to make it easier for buyers of projects like the Cottages on Osoyoos Lake to obtain financing

Under the radar

The supply of highrise condos has been the favourite bête noire among housing observers, given the visible presence they have on the skyline and the significant impact they can have within a small area.

But in recent conversations, veteran analyst Frank Schliewinsky of Vancouver real estate consulting firm G-Force Group has pointed out that low-rise units might be a greater threat to the market.

Citing figures to the end of May from market research firm MPC Intelligence Inc., Schliewinsky noted there are more than 7,000 highrise condo units being marketed in Metro Vancouver, or the equivalent of more than a year’s supply.

Meanwhile, there are 5,475 low-rise condos sitting unsold or yet to be released in projects now selling. And with absorption of low-rise units averaging 200 a month, Schliewinsky thinks that’s a problem.

“We’re looking at closer to 26 months of sales in terms of unsold low-rise inventory,” he said. “Sales are basically going soft, down a little bit from what they were, [and] inventory is shooting up.”

Combined with a lack of appetite among investors – especially foreign investors – for low-rise product in areas such as Surrey, Schliewinsky said low-rise units pose a significant risk to the Metro Vancouver market.

“The focus of the concerns of the Bank of Canada and some of the other economists has been the highrise market. In fact, it could be the low-rise market that’s in much more danger of being oversupplied.”

Schliewinsky added that many developers will take note, scaling back marketing that results in up to 10,000 units offered to the market in the next 12 months. But he doesn’t expect everyone to take note.

“It’s a hard market to turn around. Even after there’s an evident downturn, the product will still be coming on the market for the next six, 12, 18 months.”

No fears

A change to the language of the lease agreements developers sign when pursuing developments on land administered by Aboriginal Affairs and Northern Development Canada has put paid to Canada Mortgage and Housing Corp. fears that prompted the CMHC to withhold its approval of mortgages sought for units on the properties.

The change allays concerns that the bankruptcy of a developer holding a head lease that allows it to develop on reserve land would terminate the subleases granted to home buyers. Termination would, in turn, eliminate the security backing any mortgages buyers required.

The CMHC withdrew its approval of such mortgages in 2010, but a change to the wording of lease agreements that took effect in late June means its approval is back in place – giving lenders the confidence to write mortgages for such properties.

“This is a really important issue, in my mind, for any developer or buyer who’s looking at doing or investing in a development on reserve land that’s governed under the Indian Act,” said Andrea East, a business lawyer with Pushor Mitchell LLP in Kelowna. “If CMHC won’t approve it then it’s harder to find a buyer who qualifies to purchase because they can’t get a mortgage.”

The change was spearheaded by Chilliwack developer Eric Van Maren, who is developing the Cottages on Osoyoos Lake on land leased from the Osoyoos Indian Band.

Van Maren plans 284 cottages on the site and has logged 40 sales since the project’s relaunch last year.

Two sales collapsed when a major bank refused to approve financing for even half the purchase price. While other lenders were willing to step up, the buyers didn’t want to break long-standing relationships with the bank.

“A lot of lenders routinely ask developers like us, ‘Is your project CMHC approved?’” Van Maren said. “If the answer is yes, that gives the lender the comfort that somebody at CMHC has gone through the headlease and sublease documents and determined that the security being offered to lenders is good security – even though our buyers may never need CMHC insurance.”

With a recent survey for Royal LePage suggesting that low interest rates are an encouragement to 58% of prospective recreational property buyers, CMHC mortgage approval could help developers clinch a few more deals with buyers on Osoyoos band land. •

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