'Financialized' landlords not responsible for social housing, industry rep says

The role of large real estate investment corporations is coming under scrutiny as Torontonians face major rent hikes at their aging apartment buildings.

A CBC News investigation publishedMonday focused on the rise of the "financialized" landlord,whose business model allows outside investors to share in the profit of rental housing.

Some tenants and housing experts believe this model is leading to higher rents across Canada, as the pressure to increase shareholder value becomes the top priority and these companies expand their share of the country's rental stock.

But an industry representative arguesCanada's real estate market couldn't survive without these big firms.

Michael Brooks is CEO of Real Property Association of Canada (REALPAC),anassociation that represents many of the country's biggest landlords.He spoke to Metro Morning host David Common on Tuesday about the role of real estate investment firms.

Below are several key moments from that interview.

Note: The transcript below has been edited, reordered and condensed for clarity. You can watch the full interview in the player above.

DC: Can you walk me through how the business model works when you take a building that may be affordable housing, or at least lower-rent housing, and turn it into a profitable enterprise?

MB: Well, it's hopefully profitable when you buy it. A return on your investment when you buy an apartment building is probably in the three to four per cent range, at least historically it has been. Hopefully, you're able to manage your costs going forward and your rental revenue so that there's a profit for you in there somewhere.

DC: What if it's not profitable or you want that margin to be bigger?

MB: There's always some pressure to keep up with your expenses on the cost side. So you've got mortgages that have gone from 1.6 to 3.6 per cent in the past two-and-a-half years. If you've got a mortgage coming up for renewal, you might be underwater. Your costs are going up like anybody else's wages, utilities, property taxes, all the other line items in an operating budget. Yeah, you need to raise rents to keep up with that.

WATCH | The rise of 'financialized' landlords:

The Breakdown | The rise of 'financialized' landlords

11 days ago

Duration 19:08

The National Adrienne Arsenault investigates how 'financialized' landlords may be contributing to rising rents across Canada.

DC: Do you accept that, advertently or inadvertently, that one of the consequences of a large landlord who has a large amount of capital coming in and buying a hundreds of millions of dollars building, is that rents often go up and go up considerably, sometimes above guideline?

MB: Yes, they do.

DC: And why is that?

MB: Because those buildings need renovation and repair. And there is a market for this as well.

The problem is that we're overwhelmed with demand. You make it sound like the landlords are unilaterally raising the rent. The other side of that coin is that tenants are out-bidding each other for the right to rent that vacant unit. If you have 10 tenants chasing one unit, guess what? The rent's going up. We've probably had situations where there are 50 tenants chasing one unit. That's the worst case scenario going forward. And that's why we really need a lot more supply in this country.

DC: We often hear the narrative from people who are on the receiving end of this, renters who are saying, well, look, my rent is going up, or there's going to be significant renovations and I'm going to be tossed out of here. They see it as a negative thing. You have argued that it is a necessary thing to have large enterprises buying up these larger buildings. Why is that?

MB: First of all, the larger landlords in Canada, many of whom are REALPAC members, owned about six per cent of the market of large buildings. At six per centthey're not price makers, they're price takers. Whatever the market would be in a certain city or town, that's going to be the market for available rents. I don't think the "snapping up" piece, I just don't think that's really happening much anymore. They're very focused in larger cities because that's where the investors want to be.

DC: But you've argued this is necessary.

MB: This isn't a mom and pop business. To buy an apartment building is in the hundreds of millions of dollars.Remember, most of these buildings are 50 years plus of age.These buildingsneed a ton of renovation work. You will often see apartment buildings going through that process of rusting, balconies needing repair, new glass, new insulation, new elevators, new roof, all of those things. It takes a lot of capital. The big institutional landlords have that capital. It's your and my capital through our real estate investment trusts (REIT) investments, through our pension fundsif we're lucky enough to have one.

DC: Who's actually buying these buildings? They're often investment trusts, but who are the investors?

MB: The investors are pension funds, maybe even your pension fund here at CBC, because it's a stable asset class. There's always been modest growth in it. Instead of having one or two tenants in a major office building, for example, you've got 300 in a single building. So your risk of rent declining is low if someone moves out and hopefully you can move people back in. So it's a desirable asset class all over the world.

DC: You've made the argument that it is not up to private enterprise to build affordable housing. Whose job is it?

MB: It's the government's job to subsidize tenants who are below the level at which they can make rent payments. And we've advocated that in the National Housing Accord, so rent support programs, supportable housing benefit and others, in conjunction with the Canadian Alliance to End Homelessness.

Look, the private sector can't provide social housing. We do need to make a return. Your pension plan needs a return to pay your pension at some point in time down the road. So there's this balance that we have to find in the marketplace, but we definitely need the government to be more present on social housing and on affordable housing in a variety of ways. Build it, own it, operate it, including non-governmental organizations (NGOs). Get NGOs more involved in this sector. They need to be funded on the debt side and they need to find equity.There's no big not-for-profit enterprises in apartment rentals in Canada. We need a bigger group in that market to help it scale. We don't have that right now.