The speculation tax threatens to derail a resurgence in rental property development in the Central Okanagan, say industry insiders.
Rising rental rates, reasonable land and financing costs, along with Alberta’s economic downturn sparked a renewed interest among developers in building rental properties in Kelowna and West Kelowna over the last few years.
The City of Kelowna reported last month that there are 2,937 rental units either recently occupied, under construction, approved for development or in the approval process. More than 50 per cent of those units, 1,479, are currently under construction, representing an increase of 22 per cent in the local supply side of primary rental housing.
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Jonathan Friesen, CEO with land developer Mission Group Enterprises based in Kelowna, says the change in construction cost viability began to emerge four to five years ago.
“Rental buildings are a longer term investment. Condo building is more a situation of instant cash return while building rentals are more of a legacy project for a company. The return on a rental project investment trickles out slowly at first, and some developers even go in the hole initially.
“But investors can see a building that produces long-term stable income from rentals as a great investment opportunity. For us, rentals are part of our corporate strategic plan, so the outside world sees us as more than builders and sellers of condo residences. We’d love to get more involved in rental home building as well.”
Friesen is critical of the tax for the lack of research that apparently went into drawing up the policy.
“The consensus seems to be the government should have done more economic modelling on the potential outcomes of this tax before trying to impose it,” he said.
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“It’s shocking and hard to comprehend why that wasn’t done. As a private company, we go through painstaking measures to model for every contingency for any project we do. It’s hard to imagine why the government did not do the same.”
The provincial government introduced the speculation tax plan in the Feb. 20 budget, and made some changes in March after the initial backlash.
The tax is being reviewed further with a decision whether it proceeds or if the guidelines change expected by October.
The stated purpose of the tax is to push speculators out of the housing market, and to help turn vacant and underutilize properties into rental accommodations.
The tax imposition on vacant homes would be .5 per cent of the property value for B.C. residents who are Canadian citizens or permanent residents. The rate for out-of-province residents would be one per cent and for foreign investors two per cent.
Property owners who rent out there properties for at least six months a year would be exempt from the tax.
The speculation tax zones would be the Lower Mainland, Nanaimo, southern Vancouver Island, West Kelowna and Kelowna.
Scott Butler is president of High Street Ventures, a company behind construction of more than 1,000 rental units across the province, including two projects in the Central Okanagan—Mission Flats in Kelowna and Carrington Ridge in West Kelowna.
Butler said the two per cent increase in property transfer tax will have a greater impact on rental housing projects likely than the speculation tax.
“They talk about wanting to build more rental or affordable housing, and then they go and add another two per cent to our building costs,” Butler said. “To me, that is the big story that is being missed.”
Butler said the rental scenario unfolding in the Central Okanagan has been played out many times before in other communities—shortage of rental housing, costs line up where rental housing is financially viable for builders, that starts a rebound glut of rental development, and subsequent competition to fill rental vacancies creates competition and a drop in rental rates.
“We have seen how this rodeo plays out before. Kelowna will be no different, unless there is a surge in population or employment beyond what is predicted. The real estate markets are cyclical by nature,” he said.
Butler said while the idea of taxing rich buyers of houses worth more than $3 million sounds politically appealing, it also captures rental apartment projects, which carry a construction cost of $35-$60 million.
“Whether we sell or keep an increase in property transfer tax by two per cent on the value over $3 million will reduce the selling price or value by the full amount of the property transfer tax increase and make future projects less viable and current projects less profitable, thereby reducing our ability to continue to create more affordable housing in B.C.,” stated Butler in a letter sent April 5 to Selina Robinson, provincial minister of municipal affairs and housing.
For rental rates, Butler said $1,000 to $1,500 range for a standard two-bedroom apartment unit will help attract more rental construction coupled with a low or minimal vacancy rate.
Butler says he can imagine the government has been inundated with letters on the taxation issues, but he admits to a little frustration over why a month later and they have heard no response.
“We have heard nothing. No response and no contact. For a company thats build nearly 1,000 new rental apartments in B.C. and would like to build more…there are probably not that many developers who have built or plan to build as much rental housing as we are right now.
“Affordable or rental housing is not just an issue about our own self-interests (as land developers) but a problem we need to solve as a province and as a country. If we work together to figure out solutions, I think we will find better ways to solve the problem.
“I give the city credit at least for taking the time to visit our office and ask questions about what else can be done as incentives for rental apartment development.”