Canada is a fast-becoming a playground of the rich and luxury real estate in 2018 is expected to follow suit. According to reports, there are now 4,110 ultra-high-net-worth-income-earners (UHNWI) in Canada—people with a net worth of $30 million USD or more. This is a 15% year-over-year spike, according to the annual Wealth Report put out by commercial real estate agency Knight Frank. (The next report is due out in late February 2018.).
One reason for the sharp increase in the ultra-wealthy is because of immigration. Millionaire migrants are attracted to Canada’s political and economic stability. Vancouver takes the top spot and Toronto takes spot No. 5, while Colombo, Sri Lanka, Ho Chi Minh, Vietnam and Hyderabad, India help round out the top five spots worldwide. (Melbourne and Sydney, Australia and Shanghai, Shenzhen, China take the next spots, while Mumbai, India and Dubai, United Arab Emirates close out the list).
However, immigration isn’t the only reason for Canada’s growing ultra-high-net-worth (UHNW). Perhaps the biggest reason for the surge in Canada’s UHNW is an increase in a household’s net-worth, which translates to increased appeal in luxury real estate.
Turns out that despite that some real estate market segments appear to be totally unphased by the latest measures meant to cool foreign buyers, curb speculators and side-line under-funded buyers. In a breed of its own, luxury properties appear to be holding strong, both in Canada and across the world. Better still, say the experts, the real estate market offers room to grow for luxury real estate in 2018.
What is a luxury property?
To be considered luxury a property must sell for at least $1 million CDN. To be considered ultra-luxury, a property must sell for over $4 million CDN.
Problem is in a country where real estate markets have surged over the last few years and grown over the last decade, the barrier of entry to be considered luxury is not that high. Considering that the average sale price of a Toronto property was just under $730,000 in 2016 and the Home Price Index for the Greater Vancouver Area was just a smidge under $1.05 million CDN in November 2017 and we can see that properties that were once considered standard, middle-class family homes are now part of the luxury real estate category.
Still, the luxury property market is a global asset class and one with its own customs and market cycles. For instance, regardless of the type of property most luxury real estate prices will include a sale price—the list price we are all used to seeing—as well as a per-square-foot price (PSF). The PSF is a basic building block of condo and commercial real estate—property segments that see more international competition and require an easy way to compare units from country to country, particularly on paper.
As a result, almost all luxury property reports concentrate on PSF. Take, for instance, the Institute for Luxury Home Marketing (ILHM) Report, which measures market conditions for luxury properties in 31 American metro areas, including Washington D.C., Tampa, San Francisco and New York. Every month, the ILHM report provides an overview of the luxury property market in these 31 cities starting with the composite price and the Asking Price Per Square Foot.
Canada’s leading luxury markets
As of 2017, the average price per square foot for all downtown Toronto condos was $820 CDN. This price drops to $629 if you look at the entire GTA, but strip away all properties that aren’t considered luxury condos and that square-foot price rises to $1,500 CDN per square foot.
While that might seem high to the average home buyer, these prices are considered a bargain when you compare them to other international spots. According to Christie’s Luxury Defined, New York’ luxury condos sell for an average of $2,390 CDN per square foot, while London’s luxe averages in at $2,480 CDN per square foot and Hong Kong square footage is priced at $3,850 CDN.
Prices have been steadily increasing in the luxury sector year over year, explains Barry Allen, Zolo’s co-founder. As a licensed agent, Allen is accustomed to the demands of West Vancouver and North Shore clients. “The price tag appears enormous to most Canadians, but we’re still undervalued when it comes to luxury properties.”
Frank Magliocco, Partner in the Audit and Assurance Group of PwC Canada and co-author of PWC’s Emerging Trends in Real Estate report, believes that years from now, we may all look back to 2016 and 2017 as the “golden era for Toronto.” A time when international interest—particularly those with money—began to take notice. Magliocco adds, that we may be in “the moment that sparked the city’s ascendance to the world-class short list.”
Even in a city like Vancouver, where new-build condos start at $1,600 CDN per square foot and can rise to $2,500 CDN per square feet (just check out the Alberni project, just a stone’s throw away from the city’s stunning Stanley Park), luxury real estate is still considered a bargain. In an interview earlier this year, Michael Ferreira, principal at real estate consultancy Urban Analytics, suggested that demand for luxury properties could push PSF prices to $3,000 CDN in 2018.
Don’t think prices could continue to rise in Vancouver, particularly for luxury real estate? Think again. According to the Conference Board of Canada, Vancouver’s economy is forecast to grow 2.5% in 2018 (up slightly from 2.4% in 2017). While the Board cautions that recent government and market measures could contribute to a weaker outlook, this dip is only in the near term. In the report, Alan Arcand, Associate Director for the Centre of Municipal Studies, points out that investor demand and redevelopment opportunities in Vancouver are the highest in Canada.
“At the centre of Vancouver’s slower economic growth is the cooling housing market, which will limit output growth in two of the city’s top performing industries—construction and finance, insurance and real estate. However, we still expect these industries to log decent performances and other areas of the economy to pick up some of the slack,” explains Arcand.
Already there are signs that buyers are shrugging off recent measures, such as the August 2016 implementation of a foreign buyers’ tax, that was used as an attempt to try and cool Vancouver’s real estate market. The benchmark price for condos rose 19.4% between August 2016 and August 2017, according to the Real Estate Board of Greater Vancouver, while detached home prices rose only 2.2% over the same period.
Which luxury real estate segments will thrive?
It appears the strongest real estate market segments in Canada are in the commercial real estate space, with office properties leading the way and retail and hotel developments trailing.
In those segments, only luxury hotel and the luxury retail are expected to get investment and development funding, although both segments face uphill challenges.
Magliocco points out that “Canada’s retail sector continues to be affected by the rapid, relentless growth of online shopping and consumers’ changing needs and expectations.” As a result, the outlook for retail property across the country presents a varied picture. “In Toronto and Vancouver, the battle for space downtown is fierce, because that’s where the people are and where population growth will be.”
Still, PwC analysts are confident that luxury retail will evolve, despite online competition. “Given Canada’s cold climate, well positioned destination-based malls will always have a place for shoppers, and retail in downtown cores will remain attractive as a key element in the live/work/play lifestyle that Canadians crave and for which developers are building.”
Prospects for new developments or investments in luxury hotels, on the other hand, look less than ideal. While this segment was favoured about a decade ago, it has slipped from its favoured spot. This slip is, in part, due to the cyclical nature of real estate and, in part, impacted by political and economic uncertainty, particularly in the United States.
According to JLL Research, a global firm based out of Chicago, IL that specializes in real estate and investment management, the national vacancy rate for Canadian office space dropped to 12% in Q1 2017—the first decline in four and a half years. Part of the decline is that fewer office spaces are coming into the market and this trend will continue for the next few years. But the shift away from office space is what will make 2018 a strong year form this commercial real estate market segment. “The market will see less new office product coming on stream over the next couple of years, which should keep vacancy rates from going back up,” observes JLL Research analysts.
By and large, the overall condominium sector is poised to perform steadily in 2018. Analysts predict steady demand in most markets across Canada, although condo units in downtown cores will continue to show a strong return. “These units are attractive to young professionals, whose appetite for the live-work-play lifestyle shows little sign of abating,” observes Magliocco. Added to this demand are retiring boomers, who are poised to capture the equity in their single-family residences, allowing them to move to smaller, more carefree condo living that is closer to urban amenities. “But the condo industry is evolving in response to new needs and pressures,” writes Magliocco. This includes offering more luxurious condo space that fits the desires and needs of retirees with more equity than they initially anticipated in retirement (due to record-breaking housing value appreciation in the last decade).
Yet, not all luxury market segments are poised to thrive in 2018. According to the analysis done by PwC’s John McManus, one luxury segment that is struggling is the single-family detached home market.
He notes that “residential development is overbuilding in this particular luxury sector in a handful of cities.” Instead, the “sweet spot” for developers of single-family houses will be mid-priced homes, smaller than the “McMansions” that were so popular during the last single-family housing boom.
Another factor that will impact luxury single-family homes is the prediction of Canada’s modest economic growth in 2018. “This will inhibit Canadians’ ability to buy new homes,” explains Magliocco. However, developers anticipated this situation and already made a shift toward multi-family construction. According to PwC analysts, two out of three new homes built today are now multi-family homes, up from less than half of new homes constructed in the mid-2000s.
Luxury real estate takeaways for 2018
For those in the luxury real estate segments, there are a few key takeaways.
First, luxury condos are poised to continue their strong selling streak. This is due to demographic demands from the first-time, urban professional buyers, as well as demand from retiring baby boomers. Those selling luxury condos can expect top dollar going into 2018, despite recent initiatives to cool urban markets.
Commercial investors in the Class A retail space will need to keep consider ways to create destination-like reasons to lure shoppers. This will probably mean catering to certain market segments, such as urban dwellers or the high-net-worth.
Those selling luxury single-family detached homes may find that prices will start—or continue, depending on the market—to slip in 2018. But any dip won’t be too dramatic considering new inventory in this market segment isn’t expected to inflate the overall number of units. That said some markets in Canada will need to rebalance before stabilizing. This is particularly true of so-called luxury properties in higher priced markets in the Greater Vancouver Area and the Greater Toronto Area. In particular, there may be sharper drops in homes prices in the luxury market but without the luxury expectations (think finishes, land size or proximity to desirable areas). Still, any price drops will be minor, in the grand scheme of things, as limited inventory will sustain upward pressure in the long term for this luxury market segment.
Finally, luxury hotel buyers may see opportunities in 2018, as many high-end luxury properties may come into the market as these investors try to capture their equity in order to move into other market segments.