Public-private partnership launches $1.3-billion fund to purchase unsold GTA condos

Condominiums near the CN Tower in Toronto, Ont. Photo by Cole Burston/Bloomberg files

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A private Canadian investment firm has teamed up with a provincial Crown agency to purchase and convert some of the growing inventory of unsold condominiums in the Greater Toronto Area (GTA). If all goes according to plan, the condos will be converted into long-term, affordable rental housing.

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In a press release, High Art Capital, a Toronto-based real estate investment firm, said it has allotted $1.3 billion to the initiative with its partner, Building Ontario Fund.

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The pair will focus on purchasing blocks of newly completed condo units that have yet to find buyers and convert them into 2,200 rental homes, roughly 550 of which will be designated as affordable housing.

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The investment includes $294 million in mezzanine debt and $6 million in equity, according to BOF chief executive, Michael Fedchyshyn.

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Fedchyshyn believes that the provincial capital will help draw more private investment.

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“BOF’s anchor investment is providing the confidence necessary to attract private investment to the fund in the form of approximately $733 million in senior debt and $300 million in equity, bringing the total intended fund capitalization to approximately $1.3 billion,” he said.

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The majority of BOF’s return is expected to come from the interest on the mezzanine loan, which has a term of about five years. BOF’s equity position gives the fund a “nominal” ownership interest in the portfolio. The precise ownership share was not disclosed.

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The strategy comes at a difficult time for the condo market. According to real estate and consulting firm Urbanation, about 4,000 newly completed condominiums remain unsold in the GTA, with another 3,000 units in limbo after presale buyers failed to close.

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Urbanation president Shaun Hildebrand said the concept of institutional investors buying unsold condo units and converting them into rentals has been discussed for some time.

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“We’ve been calling for an initiative like this for the past two years,” he said. “The GTA housing market has two very identifiable problems, an oversupply of unsold condos and a lack of affordable housing.”

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Hildebrand thinks the program could absorb close to one-third of the completed unsold inventory.

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Similar conversations are happening in other markets.

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“We are currently in active discussions with numerous developers and investors who are interested in this type of opportunity,” said Mark Goodman, principal at Goodman Commercial Inc. in Vancouver.

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“There is a significant appetite for it … it represents a strong win-win,” he said. Developers can clear unsold inventory and redeploy that capital elsewhere, while investors can acquire high-quality units at attractive prices.”

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Hildebrand explained that due to weakened condo sales, investors who bought pre-construction and are now completing purchases are adding their properties to the rental market instead of selling them. “Investors are experiencing steep negative cash flow but are left without much of a choice.”