Bad news for Montreal investors

Montreal might have one of Canada’s hottest real estate markets, but that doesn’t mean its high-rise condo investors are reaping the benefits.

According to a Canada Mortgage and Housing Corporation report, upwards of 75% of investors in the new high-rises that have recently sprouted around downtown Montreal are in the red—the reasons being their mortgage payments, condo fees and annual taxes.

“We had a sample of 375 condo units being rented out of the new high-rises in Montreal, and we see cash flow is mostly negative in those condos,” Francis Cortellino, a CMHC economist, told CREW.

The number could be lower, though. Cortellino advises that the study presumed those buyers only put 20% down to purchase their units, but the reality is a number either put more money down or even purchased in cash.

The report brings to mind a joint report from CIBC and Urbanation earlier this year that revealed 44% of Toronto’s condo investors were in negative cash flow—of which 45% were short by less than $500, and 20% between $500 and $1,000. In that case, investors were very likely banking on long-term asset appreciation, and may have even been using their losses to offset taxes.

“This report is more of an open question about Montreal. We’d have to dig deeper,” said Cortellino. “Investors in Montreal may be hoping for the same result that cash flow may be negative in the short-term, but when they sell their units, value would increase a lot. This report is the first step to seeing what’s going on in those new very large high-rises in Montreal.”

The CMHC report showed that operating expenses exceeded rents by an average of $385 a month.

Brad Henderson, president and CEO of Sotheby’s International, says there could be other factors at play. If Toronto is any indication, the most likely reason is that investors are hedging on expected appreciation.

“If it’s a fully financed condo, it’s as true in Montreal as it is in Toronto,” he said. “Most people are banking on appreciation of the underlying asset, in this case a condo, being part of their overall return. They’re expecting appreciation will be more than enough to compensate them for their negative cash flow, and only time will tell if that’s what will happen. In Toronto, people have been rewarded for new construction condos, where they’ve had to fund them for the first couple of years before selling them either to another investor or to an end-user.”

Written by Neil Sharma