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$300-Million Fund to Bring Badly-Needed Supply to Canada’s Biggest Markets

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On the cusp of a population explosion, fundamentals in Canada’s three largest cities’ condominium markets have probably never looked this good.

That’s why KingSett Capital, a major Toronto-based equity and debt financing firm, managed to raise a $300-million fund to invest in joint-venture high-rise developments across Toronto, Montreal and Vancouver. With 411,000 newcomers slated for arrival in Canada this year and another 421,000 next — not to mention chronically undersupplied housing in urban centres across the country — intensification, which is already mandated in Ontario through the 17-year-old Places to Grow Act, appears the likeliest path to housing so many people while stemming rapid price appreciation.

“We believe firmly in the urban thesis. Our focus is going to be transit-oriented, urban core locations in these major markets to take advantage of accelerating business and employment growth, as well as immigration trends that are unfolding across the country, which are driving a need for more housing,” Rob Kumer, President and Chief Investment Officer of KingSett Capital, told STOREYS. “Our newest fund, ResDev [KingSett Residential Development LP], is solely focused on high-rise residential development in Toronto, Vancouver and Montreal to capitalize on a growing need to supply additional housing to meet accelerating demand from homebuyers. The need for an institutional capital provider is accelerating as the projects in our major cities are growing in scale and complexity.”

On that front, Kumer says, the firm’s strength lies in its institutional balance sheet and in-house development and financial expertise that its developer partners can rely upon. Moreover, as cities intensify, the square footage of newer developments are easily 500,000 square feet — sometimes even 1 million — and partners who can provide capital on an institutional scale are increasingly imperative.

“These projects are massive and require enormous amounts of capital and substantial balance sheets,” Kumer said, “and our view is that there is a real need for a capital provider who can bring this kind of institutional scale to the venture. We have the capital, balance sheet and the expertise to add real value to a project. And our capital is committed so there’s no execution risk. We have the money.”

Capital to be Focused on High-Density Housing, Rental

While Kumer anticipates that most of the fund will be invested in condominiums, he thinks some capital will be allocated towards multi-family residential opportunities.

“It is possible that we source opportunities that are 100% rental development and we are certainly open to participating in those kinds of projects as well,” he said. “KingSett itself has developed some very compelling rental projects in ultra-core locations, such as our Toronto projects at 2 St. Thomas in Yorkville and 99 Gerrard, located downtown. We would be happy to consider doing more of this kind of development.”

Rising Construction Costs Pose Affordability Challenge

Headwinds have blown into the real estate market, though. According to Ari Silverberg, Co-Founder and President of Harbour Equity Capital Corp., an equity financer that also partners with residential developers, construction costs are on the rise in the current inflationary environment, but the economics in residential tower construction aren’t as bad as in other segments of the real estate market.

Read: Rising Lumber Prices Deal Another Blow to Housing Affordability

“As challenging as things have been on the inflationary front for mid-to high-rise condo buildings, it’s been even more stark on the low-rise side where everything from servicing sites to constructing homes has increased substantially,” Silverberg said. “In one case, we sold townhouses at more than 10% over our pro forma and were still under where we thought it would be as it relates to profitability. We were down in the 60% range of where we thought profits would be.”

Equity financers are understandably conservative because protecting their stakeholders’ investments is paramount, and, as Silverberg’s example demonstrates, that kind of calculus helps them turn profits—Harbour Equity accepts minimum commitments of $125,000 and targets 15% internal rates of return.

“Our number one concern is, do we lose capital on this project? There are times we get projects and say, ‘This could be incredible,’ but, for whatever reason, it’s a situation where there’s risk. We’d rather do a less lucrative deal with less downside than the alternative. A lot is based on the revenue side with where things are going. We’re in a tremendously inflationary environment, in terms of cost, and we do a lot of work on what our costs are going to be down the road for a project. Even if there is growth in revenue, will that be enough to take care of the cost of inflation coming down the pipeline?”

Developers Continue to Grapple With Supply Chain Delays

The supply chain bottleneck has been a nightmare for developers because materials and appliances seldom arrive on time. Silverberg recounts delivering a development that was additionally plagued by a trades shortage, and because of the disrupted supply chain, houses were closed without cabinets and appliances. Moreover, personnel were required to stay on site longer, which added even more cost onto the project.

However, there are always factors that mitigate risk.

“[The trades] were demanding a higher share of the pie, and in one case we closed homes without cabinets and appliances, but people were still thrilled because between when the houses were sold and closing, the homes’ values increased by probably 40%,” Silverberg said. “In a city like Toronto, if you’re in a reasonable location in a reasonable part of the city, and probably even if the market were to decline a little bit, you’ll be able to sell units. We’re really looking more at what has stuff sold for in the immediate area and what kind of interest there will be. But we also look at scenarios in which there could be, say a 5-10% decline and ask, ‘Will we get our capital back and not lose equity?’”

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