Strength in numbers
The second iteration of the B.C. apartment income and expense survey is underway, and Jeremy Bramwell is keen to see if this year’s findings bear out the surprising revelations in last year’s numbers.
Bramwell, an appraiser and principal of Bramwell & Associates Realty Advisors Inc., initiated the survey last year to put some facts behind the rules of thumb governing the valuation of local apartment buildings. He found support for the survey through LandlordBC (the BC Apartment Owners & Managers Association, prior to its merger last summer with the Rental Owners and Managers Society of BC and the Rental Housing Council).
The initial survey solicited information from some of the 3,000 to 4,000 rental buildings in the Lower Mainland, but this year’s survey extends to Victoria, reflecting the addition of the new organizations under the LandlordBC banner.
While a fraction of the potential respondents participated – just over 100, a number that was pared back to 96 when strata properties and single units were eliminated – the findings nevertheless surprised Bramwell.
“Traditionally, appraisers have always been estimating that operating costs are between 35% and 45%,” he said.
But the survey indicated that operating costs in the Lower Mainland average 53.6% of rents and other cash properties generate for owners.
The biggest expenses are repairs and maintenance (11.8%), property taxes (6.75%) and non-resident staff (6.2%), followed by utilities (5.7%).
Given increases in property taxes and utilities, and the cost of maintaining an aging stock of properties, Bramwell said the numbers indicate that government-regulated rent increases are insufficient to match government-regulated expenses such as property taxes and utilities.
“They’re increasing at a rate higher than the annual allowable rent,” he said. “It’s slowly beginning to push the [net operating income] to a point where it’s less than 50% of the income for the property.”
Rising expenses without a commensurate increase in income can have a significant effect on valuations, Bramwell said, especially when cap rates – an indicator of the return a property promises investors – are low.
David and Mark Goodman of HQ Real Estate Services Inc. report that cap rates have fallen 60% over the past decade for multifamily properties and are now between 2.5% and 4.25%.
“When you’re down to between 3% and 4% on a cap rate, a couple of thousand dollars’ change in expenses without any adjustment in the income can start to have a rippling effect to the capital value,” Bramwell said. “That’s why watching the expenses is extremely important, especially in a lower-cap environment.”
Development costs
A note in this space a couple of weeks ago regarding a provincial review of development cost charges yielded a document explaining the guidelines the province is preparing following a two-year study process.
The province discourages the use of levies as development taxes. It said community amenity contributions (CACs), typically levied at rezoning, shouldn’t be used to maximize revenue for municipalities.
While the province acknowledges that developers require certainty around CACs – something Vancouver staff have been seeking to address through standardized CACs – it encourages a negotiation process that respects the interests of landowners, developers and the financing parameters for projects.
“One approach to CACs will not fit all situations,” the province said.
The aim is to mitigate the impact of development charges on property end-users: tenants and homeowners.
CACs that are excessive boost development costs and force developers to either trim returns to the point where investors shy away or boost the price of residential units, thereby reducing housing affordability.
While municipalities such as Vancouver use CACs to fund affordable housing and other amenities, the province recommends that other measures be used to support housing.
“Focus first on measures that expand housing supply before seeking affordable housing in ways that add cost,” the document states. “Use density bonuses and other zoning measures, which can expand the supply of various types of affordable housing without the risk of putting pressure on land and housing prices.” •
