The Matt and Ben Toronto Real Estate Team

Not All Pre-Construction in Toronto Is a Good Investment

06 December 2018
MATT CASSELMAN

 

There was a time when new construction condominiums were cheaper than existing property, a time where they were evenly priced, and now in many cases, they are far more expensive that existing condominiums. If you are considering buying pre-construction you have to be very careful that you are not paying too much for your purchase. The simple truth is the costs associated with new development condominiums have risen so much that they are trading, regardless of quality and precise location, at some of the highest price points in the City.

Here is a look at why:

-City Fees & Services- There are a litany of fees associated with new construction condos imposed by the City of Toronto. The City will tack on fees for improving or creating local parks, improving or building local schools, and in some cases there will be some form of art levy to beautify the neighbourhood. Services also cover the expensive capital upgrades needed for the property. For example every time a new building is built the City has to create new water intake and waste water removal systems in addition to both gas and power lines which have to be run to the building. It is difficult to predict the costs of City fees and services as they are a moving target costing millions of dollars. This cost and uncertainty is passed on to the buyer.

-The Cost of Land- has increased dramatically. Whereas a prime piece of land suitable for a condominium development in the 90’s may have cost $5,000,000 the current market price for a similar piece of land would be more like $40,000,000.

-Construction Costs- in Toronto have also gone through the roof. This is for many reasons. Steel has more than doubled in price within a short period of time. The companies that manufacture concrete slabs are operating at maximum capacity therefore their prices have obviously increased. The number of skilled trades are stretched thin. We also only have a couple recognized elevator manufacturing and maintenance companies in Toronto that can’t keep up with the demand.

-HST Implications- Here is an example that was broken down for us by Kate Grossi from Korman & Company- one of our go-to real estate lawyers. "My clients recently purchased a new construction condo. The purchase price on the contract was $720,000. The price includes HST. The HST is approximately $84,000. The builder will be getting an HST new construction rebate of $24,000 from the CRA as the buyers will be occupying the property as their primary residence. Therefore even with the credit, the builder is still paying $60,000 in HST to the CRA from the $720,000 purchase price." - Kate Grossi, Real Estate Lawyer- Korman & Company

Recently I was told by a friend in the industry that when they started constructing a small boutique condo building they were told by Toronto Hydro that the electrical hookup fee for the building would be $300,000. Once the building was completed Toronto Hydro said they did not have enough power on the street to service the building and would have to run new lines. The developer was dinged with an additional fee of $1,000,000 to bring power to the building. You can imagine if you did not build in enough of a profit margin how a last minute bill of this size could make or break your development.

Another recent story that I heard was about a parcel of land in downtown Toronto which recently sold for over $50,000,000 to a developer and in less than 2 years that developer resold the land to a foreign developer for $100,000,000 more.

What I am trying to illustrate here is the cost of developing condos in Toronto in 2018 far exceeds the cost of developing in the late 80’s or 90’s or even the early 2000’s. At that time most of the costs associated with the projects built were spent on building materials and labour. Today, with so many additional costs that developers have to take on it is only natural that the price of pre-construction condominiums continues to rise.

Resale May Be a Better Option & Investment For You

If you are looking for a condominium in Toronto and would like to get as much square footage in the greatest possible locations (i.e. near subways and public transit, highway access, as well as a fantastic neighbourhood feel or steps to the financial district depending on your desires) your best bet would be to buy in older established buildings.

Of course we are always looking for the next best new construction projects for our clients. The last two that we sold with passion and confidence were the Wonder Lofts developed by Greywood and built by Alterra and Riverside Square developed and built by Streetcar Developments. We are extremely confident that in both of these projects there was meat left on the bone for investors to profit when they eventually sell their properties. We were also platinum agents for both of these projects which means that we had access to the unadvertised grand-opening sales event where the prices were less than when launched to the public.

However, buyer beware of walking into a sales centre unrepresented or with an agent that you hardly know. Should you not be scrutinizing new construction logically- meaning analyzing the current resale market in a particular location of comparable structures then you are simply throwing caution to the wind and will likely have to wait an extremely long time to get a return on your investment. In some cases 10 years+.

It simply doesn’t make sense that properties in C and D locations should be trading at the same price as the new Four Seasons in Yorkville. This is what happens if you walk into a sales centre where people are simply trying to sell you something and not actually representing your best interests.

Our recommendation is to not buy a pre-construction condo without doing a full tour of the resale buildings in the vicinity. You wouldn’t buy a car without shopping around. Why would you spend half a million dollars or more without careful scrutiny of all your options? A pragmatic approach should be taken, similar to one when buying existing resale suites. Ask yourself this important question: What would the suite be worth if it was complete and ready to move into today?

Did you know that for the most part the sales people working in new construction sales centres are not licensed real estate agents and have no obligation to offer you their fiduciary duties? This means that they are simply there to sell you the product and have no legal obligation to help you make a smart business decision. You should work with an experienced realtor with local knowledge. We would be happy to provide you with our unbiased thoughts, expertise and service to get you the deals you are looking for.  

Click here for an article that we wrote earlier this year on the Matt & Ben purchasing strategy called “The Bang for Your Buck Technique”. If you did not see it the last time I strongly recommend you do.

Thanks for taking the time to read this article and we would like to thank my anonymous confidants for the vital information. 

Matt & Ben

416-465-7850

info@mattandben.ca