A recent real estate development trust (REDT) offering succeeded in raising millions for a Burnaby mixed-use project, and with another REDT on the horizon for a big Surrey project, the benefits and risks of this financing platform are coming into focus.
A REDT issued by Vancouver-based Anthem Properties Group Ltd. last fall raised the maximum offering amount of $82 million, and looking ahead to this fall, North Vancouver-based Pure Multi-Family Group is planning its own REDT for an education housing project in Surrey city centre.
“Our goal is to launch the REDT in the fall, which is dependent on the bankers and on the overall market conditions,” said Pure Group’s CEO Steve Evans.
If Pure Group’s REDT materializes, it would be the latest REDT offering in Canada, where a handful have been used to finance real estate developments on both sides of the border.
While private equity-style real estate funds have been around for ages, this generation of REDTs opens the door for a wider audience of small-scale investors across Canada to participate in development opportunities by making minimum investments from their retirement savings plans through financial advisers.
But REDTs (pronounced “red-its”) present special risks for retail investors, says one professor.
“On the one hand, it does give the ability to individual investors to start accessing development profits in real estate [and] gives developers access to a wider base of funds,” said Tsur Somerville, real estate finance professor with the University of British Columbia’s Sauder School of Business.
“But it comes with a lot more risk and uncertainty,” he said, “because it’s really tied to individual developments and the regulatory risk on those, the construction risk as well as market risk, so there’s a lot riding on the ability of the sponsor to execute.”
The nature of REDTs differs from classic real estate investment trusts (REITs), he said, because REDTs are for residential projects that haven’t been built yet and resemble operational development businesses rather than pass-through vehicles.
“There’s a lot more potential risk and uncertainty than when you’re looking at investing in a REIT, where there’s existing buildings with existing rent rolls and tenants and leases in place,” said Somerville.
Despite the risk of delays inflating land loan debt and squeezing under-capitalized sponsors, REDT prospectus offerings have found success in the marketplace, allowing individuals to invest shoulder-to-shoulder with institutions.
Most recently, Anthem raised $82 million needed to help finance its Citizen project in Burnaby’s Metrotown. Citizen is planned to be a mixed-use, transit-oriented project that would include 372 condos, 200 market rental units, 73 non-market rental units, 176 hotel suites and 4,881 square feet of retail space.
The minimum investment for that initial public offering was $10,000. If all goes according to plan, investors could receive a pre-tax compounded gross annualized return of about 18 per cent before fees over a term of five years.
“Our main goal in launching it was just to get the project built, and it was going to cost a lot of money” at over $600 million of project costs, said Rob McJunkin, Anthem’s chief financial officer.
“There’s a lot of debt but it also means a lot of equity, and that hasn’t been easy to find these days,” he said, citing government policies changing, costs increasing and market cycles “going all over the place.”
“The REDT concept was kind of new and innovative, and we thought it would be the best opportunity to get the large amount of equity we needed, and it worked so we were happy,” he said.
McJunkin attributed the REDT’s success to the financial returns it promised, as well as Anthem’s reputation as a leading Canadian developer with a proven track record.
“People believe we would get it done, as we said we would, and it’s an exciting project” with 66 storeys in the heart of Metrotown, he said.
“It was easy to make it sound very exciting and sexy,” he said, adding that the timing was also opportune from a political and monetary policy standpoint.
Steady trickle of REDTs in Canada
REDTs have been used several times in Canada in the recent past.
In 2023, Toronto-based Altree Developments Inc. and its co-sponsors marketed the REDT-like West Side Square Development Fund, an investment fund with a four-year target investment horizon and a projected equity size of US$50 million. For a $10,000 minimum investment, the fund offered the chance to invest in the development of a purpose-built rental in New Jersey.
In February 2024, Toronto-based H&R REIT created Lantower Residential Real Estate Development Trust (No. 1), which completed an initial public offering in April 2024, according to a November 12 press release.
The REDT raised US$52 million of equity capital from investors to acquire an interest in and fund the development of two development projects in Florida totalling 601 residential rental units, according to the press release. Lantower did not respond to BIV’s request for comment.
In a December 31 press release, Toronto-based Plazacorp Investments Ltd. announced it had raised $75 million through an REDT offering to develop two residential subdivisions comprising 676 residences and 297 serviced lots on 213 acres of land in Markham and Stouffville, Ontario. Plazacorp did not respond to BIV’s inquiry.
REDT could target student housing
On May 12, Pure Group announced it would partner with a subsidiary of Vancouver-based Global Education Communities Corp. (GECC) to develop a $330 million “education mega centre” in downtown Surrey.
Expected to accommodate students from nearby universities, the project includes a 49-storey mixed-use tower featuring one floor of retail space, two floors pre-leased to GECC’s subsidiary schools, 43 floors of market rental residential units accommodating 1,380 occupants, and three amenity and mechanical floors.
With SkyTrain and a Simon Fraser University campus next door, Pure Group’s Evans suggested the planned REDT could provide unitholders with a competitive yield compared to other asset classes.
“There’s greater inherent risk when you are participating in a new development than there would be if you were buying an existing, already-built, cash-flowing asset, but therein lies the reasoning why they generate a better yield,” he said.
UBC’s Somerville said REDTs are not analogous to other types of income trusts, which have lean management and are dominated by cash flow and low growth. Unlike REITs and oil-and-gas trusts, REDTs mean “you’re getting into the development side of things,” he said.
“You’re really getting into both the business of development, making money from a business activity, not from riding a general market, and you’re getting into a lot more short-run risk,” he said.
As for whether REDTs could have wider public benefits — such as democratizing real estate, spreading risk and boosting housing supply — Somerville said he’s not dazzled.
“If I’m going through my list of things that I think are important in dealing with the housing crisis, this does not make the top three,” he said.
Pure Group’s Evans suggested REDTs might indeed move the needle on housing over a longer horizon.
“Our country and particularly the major cities need more supply of good-quality housing, and so any manner that that product can be financed and more supply can be brought into the market will have a positive effect over time. That’s certainly the intention,” he said.
