cover story o'leary · 20 september 2013 canadianrealestatemagazine.ca cover story love...

20 SEPTEMBER 2013 canadianrealestatemagazine.ca

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Love or loathe him, Kevin O’Leary knows how to make money – especially in real estate. The entrepreneur and Dragon’s Den star reveals his Top Five Sweet Investment Spots in Canada to Gráinne Burns and explains why the domestic market is still a safe and profitable bet

It’s three days after the Organisation of Economic Co-operation and Development ranked Canadian real estate as the third-most overvalued market in the developed world. Kevin

O’Leary is clearly not impressed with the findings of the Paris-based outfit. You could even say the Dragon’s breathing fire.

“I love it when outsiders try and define our value,” he says. “I would choose two countries where I would put my money to work in real estate – Switzerland and Canada. And that is a very enviable place to be. So if people want to call us overvalued, they can. Investing in Canada has been a terrific play for the last

20 years in real estate and nobody can deny that.”

And so the outspoken Dragons’ Den star is off. Now the consummate media professional, O’Leary has a lot to say about Canada’s real estate landscape. But first, he questions the “soft landing” debate.

“We have started a soft landing,” he boldly remarks. “We are halfway through it already and there has not been a material correction. A correction in real estate is 30 per cent, and we have not had that happen in almost 20 years.”

O’Leary may be confident, but, as with all entrepreneurs, exceptionally cautious, even

when asked to relay his Top Five Sweet Spots in Canada. No one wants to be the messenger that gets shot if it all goes belly up, even the hardened O’Leary. And so, before he provides his list, he outlines his prediction for what will happen in the real estate market.

“Real estate is going to be an interesting space over the next three years,” he remarks. “We have never had a real estate correction like we saw in the U.S. but I think it [interest rate hikes] is going to tamper capital growth. For example, in prime residential I think it will be relatively flat, which is, in some ways, a good thing versus having a decline.”

O'LearyLessOns

SEPTEMBER 2013 canadianrealestatemagazine.ca 21

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I would choose two countries where I

would put my money to work in real estate

– Switzerland and Canada. And that is a very enviable place

to be

O'LearyLessOns

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2. ToronToO’Leary has a bird’s eye view of the Toronto condo market from his Yorkville office, and despite the wave of negative press about this segment, he remains relatively positive about the region and the high-rises dotting its landscape.

The immigration flow into Toronto is a huge positive, says O’Leary, referring to the city as a “really resilient market.” He adds that despite 86,000 condominiums coming onto the market, there has been no material price correction to date, which demonstrates this resilience.

Asked on many occasions by investors to explain the high cap rates of Toronto’s prime office space, O’Leary says he always refers to the city’s economic environment. “You have to have a long-term view in real estate. You want a stable, predictable economic environment. The city has lots of businesses that have the same metric, profile and cash flows,” he says. “You don’t have a situation where the political environment is going to change and change the forecasts of every business that you have a tenant for.”

Despite fears about Toronto’s condo market, The Canada Mortgage and Housing Corporation (CMHC) reported that construction began on some 2,400 units in May. According to CREA, the average selling price for May 2013 sales was a record $542,174 – up by 5.4 per cent compared to the 12 months previous. Sales of single-detached homes in the GTA were up by almost one per cent in May compared to the same period last year. That phenomenon bodes well for the continuing health of the condo rental market as Torontonians continue to grapple with the growing costs of homeownership.

1. CalgaryWhile believing that Calgary’s prime economic driver – the energy market – is at its most depressed state, O’Leary believes that within 24 to 36 months, there will be a resurgence of the industry that will be reflected in real estate prices. He admitted to having looked at a number of high-end condominiums in the city, and says the optimal time to buy any such unit is after the first expected rate hike. This theory is based on the assumption that with a small correction, a buyer will have maximum negotiating power. “I am an opportunistic investor and I smell that opportunity coming,” he says.

CREA statistics for May 2013 supports O’Leary’s level of optimism and outlook. Prices in Calgary rose by 6.87 per cent compared to 2012 figures, with sales also rising by 8.9 per cent. The benchmark price for condominium apartments totalled $263,600, a year-over-year increase of 7 per cent.

With fewer than normal new listings (inventory levels in May 2012 were 17 per cent lower than 2012) and sales volumes increasing, market conditions favour the seller. Improvements in the resale market, however, are being fuelled by a number of factors, primarily employment gains, migration growth and tighter rental market conditions.

Calgary has fast become Canada’s second financial hub and is now the world’s 17th most competitive business centre. Coupled with its relatively young population, the city is anticipating a kick-start of first-time buyers, which will have a knock-on effect for existing homebuyers. For landlords, in-migration and a tightening of vacancy rates is expected to accompany those developments.

Why Calgary? Buy and Hold or Flip? Buy and Hold.

Average Price: $462,045

Vacancy Rate: 1.2%

Why TOrONTO? Buy and Hold or Flip? Buy and Hold and Flip


Vacancy Rate: 1.6%

3. HalIfaxSpearheaded by a $25 billion federal shipbuilding contract, the long-term economic growth of Halifax and the wider HRM is naturally favourable for investors. Following the announcement of this contract in 2011, the real estate market in the Halifax-Dartmouth area enjoyed a timely boost, but that has slowed somewhat since. Still, CREA expects home sales to pick up again once construction and hiring hits the prime period.

At its peak, ship construction will provide over 11,500 jobs, with local industry analysts predicting the average income in the province will rise by $447 annually, helping residents buy 750 more cars and 450 more houses.

O’Leary says he is optimistic for the Halifax market considering the economic spin off to other industries, and that investors should seek to benefit. CREA says that Halifax is one of the most inexpensive housing locations in Canada; however, local real estate agents are predicting price increases of between 5-10 per cent in the coming years on the back of this ship construction.

The average price for residential activity, according to CREA, was $240,773 in May 2013, down three per cent from a last year’s record, but was still the third highest monthly average price on record. The average monthly rent for a two-bedroom apartment is $799. The average monthly rent for a three-bedroom apartment is $1,012. Vacancy rates in Halifax hover around 3 per cent. Key areas identified in the Halifax region include Fairview, Dartmouth, Montebello, Keystone and Port Wallis.

Why halIFaX? Buy and Hold or Flip? Buy and Hold and Flip


Vacancy Rate: 3%

O’Leary’s TOp 5 sweeT spOTs

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cover story


4. MonTrealO’Leary believes there is still a lot of opportunity for value increases in the Montreal area. This analysis follows Royal LePage’s expectations that home prices will decline by between 3-5 per cent this season as sellers recognize the need to “negotiate further with buyers to sell their homes.”

Montreal’s low unemployment rate is a key factor for O’Leary’s confidence in the city and especially for first-time buyers seeking to get on the property ladder.

According to Statistics Canada, some 88,000 jobs were created in the past 12 months in the Montreal CMA and the unemployment rate dropped to 7.8 per cent in the first quarter of 2013, marking its fourth consecutive quarterly decrease.

Condo development is currently strong in Montreal with the average price now in the $219,000 mark and vacancy rates within the 2.8 per cent mark. The Conference Board of Canada says that almost half of Quebec consumers feel it is a good time to make a

major purchase such as a home. Indeed, it seems that buyers have the upper hand in the Montreal condo market for the first time in 13 years as the median price did not grow for the first quarter of 2013, which has not happened since the fourth quarter of 2008.

O’Leary is not the only high-flying investor that has his eyes on Montreal. The city has become a hot attraction for foreign buyers, especially luxury properties at the high-end of the market. Like many buyers, the city’s culture and lifestyle is the main attraction.

Why mONTreal? Buy and Hold or Flip? Buy and Hold and Flip


Vacancy Rate: 2.8%

Why vaNCOuver? Buy and Hold or Flip? Buy and Hold and Flip


Vacancy Rate: 2.9%

inventory has begun to decrease, it is not a marketplace where you can sit on a buying a decision anymore. “The sellers and the buyers are working together to get homes to sell. You need to be prepared and ready to buy at close to the list price, if the property is priced well,” says Sandra Wyant, the board’s president.

She also added that the flurry of transactions in recent months is primarily due to sellers setting more realistic prices for their properties and avoiding the boom-time mindset.

Sales of detached properties increased by 2.7 per cent compared to May 2012, with the average price decreasing during the same period by 5.2 per cent to $917,200.

O’leary, lIke OTher INvesTOrs, Is relIeved

ThaT The greaT vaNCOu-ver area Is ON The rOad

TO reCOvery

5. VanCouVerO’Leary, like other investors, is relieved that the Great Vancouver area is on the road to recovery after a tumultuous market performance over the last few months.

Similar to his reasoning for picking Toronto, the Dragon says that immigration flows into the city will ensure the Lower Mainland’s long term economic appeal for investors. The city has come off the bottom by about 20 per cent, he says, and, as such, inspires a renewed confidence and enthusiasm.

And O’Leary may be right. The latest figures from The Real Estate Board of Greater Vancouver (REBGV) show that there were 2,882 sales in May, a 1 per cent increase from a year ago and a 9.7 per cent jump from April.

The MLS benchmark price for all residential properties in the B.C. region is currently at $598,400, according to REBGV. The board say that since the amount of listing

O’Leary is not the only high-flying

investor that has his eyes on Montreal


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property manager. His biggest concern is his cost of leverage because all of those buildings were bought on mortgages. He needs to be careful that he is able to raise his rents according to how rate hikes go up. That is the pressure cooker. However, he is thinking of what the Cambridge assets will be worth in 20 years. He is so localized in his market and knows every street corner, and what every home is worth to rent. Be your own property manager, feel the vibe of your building and understand what your tenants want. Know the bones of your building so you know what the capital expenditure you will have to spend [is].

THe nexT generaTIon of KeVIn o’leary enTrepreneurs

I think real estate has always been a safer investment than a dot-com or high-tech start-up as it’s a physical asset. The challenge for

young people is if they are using a tremendous amount of leverage to invest. It is very hard to do that in a period of rising rates because you need to know for certainty what your cost of borrowing is.

I have a friend in Boston on his 11th property. He lives in one of them, and is within four blocks of every asset he owns. He is the

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On his worst investment...“The worst investments are probably

when I look at some of the disasters that I have made in venture capital. You need to have a portfolio of over 10, 20 or 30 investments and one day, you wake up and someone will call and want to buy your company for some crazy money and it makes up for all of the bad investments you made.

On what he would do if he was the prime minister for a day...

“I would probably ban unions. I would do what I call the National Pipeline Act, which would allow me to put pipelines across provinces without any debate. I would reduce corporate taxes to 15 per cent. I would put flat taxes on individuals at 20 per cent. I would do all of this in 24 hours and then I would leave, but leave the country in a much better place. I think people would appreciate that and love me for that.”

On interest rate hikes...“I don’t have a crystal ball, but I am making the assumption that

between 2014 and 2017, we will have 200 basis points of rate increases. From 2003 to 2007, we had a period of 200 basis point increase over a multi-year period, which was a slow grind up. This is what I think we are going into now. It really becomes an asset allocation decision. If you have 30 per cent of your net worth in real estate, maybe it’s a wise idea to move it down to 20, as you have to weather the storm of rate increases. Going to zero in real estate is not a good move, as it has been proven over many decades that it is an excellent asset class.

On Jim Flaherty’s moves meant to stabilize the market...

“He corrected the market in an orderly fashion by 10 per cent. I think it was ingenious. It was effective and I applaud him. I don’t always agree with his policies, but I have to say what he did there was an orderly correction of a market he was concerned with. And now as a result, everyone in the market knows where we stand on these issues, and it has been reflected in prices.”

On his best investment...“My best investment has always been myself! I got involved in the

climate control storage market, and we built 13 facilities across Canada. At that time, this was a very underdeveloped area; there just wasn’t enough square footage of storage in Canada. It was an area that was considered a C-class real estate, and the upside surprise was at how well that asset class has done. You look at storage today, and it is a well-respected asset class. We sold out to a REIT in 2009, and it was a very successful transaction.

O’Leary shOOTing frOm The hip…

I would put flat taxes on

individuals at 20 per cent. I would do all of this in 24 hours and then I

would leave

foreIgn properTy: To buy or noT To buy?“I am always encouraging Canadians to look beyond Canada and the United States. It’s a very difficult task, as most people don’t feel comfortable investing outside their own domestic market. If you do not have any money in the U.S. or Asian market, you have been sorely misrepresented in term of appreciation. Investors are waking up and saying they have to get involved and it’s not too late.”

How o’leary Is enTerIng InTernaTIonal MarKeTs...“I usually use REITs, as I am not going to buy a building in a market that I do not have any physical representation in. There are plenty of great managers to do that. For example, some of the French do REITs in Cambodia. It is one of best places to put money to work.

wHaT abouT THe u.s.?“There are markets like Boston, which never really had a major correction. And, yet, when I look at Phoenix, or some of the inner coastline (regions) of Florida, they had 50 per cent corrections. This is a classic situation where you have to know the specific geography of where you are investing. It’s probably best to enter the U.S. market through a REIT than to pick individual properties yourself. Phoenix is a fantastic opportunity.“ It is up about 25 per cent off the bottom, but still 75 down from the top. So a 2,500 square foot house in a gated community is still a great buy.


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On whom he most admires in real estate...“John Love. He is a very savvy

developer and has got a great sixth sense of what markets to develop in. He has been very successful in finding really interesting opportunities in already established markets, such as (one on Bloor Street). He saw its potential and turned that into the most expensive condo real estate in Canada. He has good institutional backing, but you need someone who can look at the bones of a building and make it three times its worth trading at today.

On pitching real estate on Dragons’ Den or Shark Tank

“Real estate has not been an easy sale on Dragons’ Den or Shark Tank for many reasons. It’s very hard to bring new ideas to a table to an asset class that was one of the very first investors got involved in. Once in a while, someone will come and say ‘I own 50 acres in Niagara and I want to build a winery there

and I need two million.’ We have had a few of those, and that is what got me involved in the wine business.

On his new O’Leary Mortgage business...“The mortgage market is very

challenging, and we are a brand-new business. We won’t be fully operational until October, as we are going through the process of licensing in every province. I am all about financial literacy, so if you are a young person and taking on your first major liability, which is a mortgage, you need to have a plan and exit strategy. There are still about 20 to 30 per cent of people looking for variable mortgages, and basically they are playing Russian roulette with the rate cycle.

On the so called overheated REIT market...

“Would I invest in a 10-year government bond under three per cent yield? No. I would rather take the risk on a REIT providing me

with five or six per cent. You want REITs that are less prone to correction and asset value when rates start going back up. If you stick with high quality REITs, you weather the storm a lot better; more liquidity and less volatility.”

If you are a young person and taking on your first major

liability, which is a mortgage, you

need to have a plan and exit strategy

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cover story o'leary · 20 september 2013 canadianrealestatemagazine.ca cover story love...

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