While new condo developments continue to sell out, the buyer mix is changing. Developers think they know their buyers but they don’t! Most buyers for new projects are brought in by real estate agents – they don’t just show up at the new sales centre.
When the market exploded 10 years ago, the mix of buyers was about 60% end users or consumers and 40% investors. Today it is almost 100% investors! Why? From the time one buys a new development until it is built and registered is four years on average. Just think of a single male (or female) who buys a one bedroom unit. In four years, they could be married and possibly expecting a child – they then need something bigger and they have to sell before they even move in! So why buy something for the future? Also today’s younger generations want everything now – not in 4 years.
Among investors, it is clear that there are two types. The first, let’s call then ‘cash on cash’ investors want to buy with 20-25% down and rent the units out. It made economic sense for several years. The problem now is that condo prices have continued to rise but rental rates have been stagnant for the past three years. Now it makes little sense to buy and rent out condos in Toronto. We call these types of investors ‘North American Style Investors’
There is second group of investors – mainly Asians and Middle East nationalities who pay ‘all cash’. Currently they can get about 3-4% on buying and renting out their condos. Their rationale is that the returns are better than leaving their cash in the bank. So they continue to buy.
Currently we have a lot of new condo developments coming to market this Fall. The problem is that developers have only about 60% of the investors that they had before. My prediction: a lot of new developments will presell only 50-60 % of the units. How do they get to 70-75% to get construction financing? Do developers make special deals – selling 50 units to a single investor group at a big discount? Or do they pull the plug? We won’t know the answers until 2011!