The multi-family apartment rental sector in Canada is being transformed by the rise of “financial landlords” – huge corporate firms that acquire properties as investment products. They include private equity firms, asset managers, publicly listed companies, real estate investment trusts (REITs) and financial institutions.
While the structures of these firms differ, they are united in their treatment of apartment homes as financial assets. This shift toward financial ownership matters. Researchers who study financialization in the global economy describe how such firms operate with a single-minded focus on delivering investor profits. This leads them to subordinate other objectives, including social, environmental or equity-related goals, as a result. When it comes to apartments, finance capital values high revenues over preserving affordable, high-quality apartments for all residents.
Financial landlords raise capital from investors and use it to buy large portfolios of buildings. Next, they apply strategies to increase the profits from these buildings and then distribute the profits among executives and investors.
Over the past three decades, financial landlords have consolidated an increasing amount of the country’s multi-family apartment homes. REITs alone have grown from owning zero suites (units in apartment buildings) in 1996 to nearly 200,000 last year. In total, the largest 25 financial landlords (REITs and other types of firms) held about 330,000 suites last year – nearly 20 per cent of the country’s private, purpose-built stock of rental apartments.
Canada’s biggest landlord, Starlight Investments, amassed 60,000 suites by the end of 2020 after buying Northview Apartment REIT (27,000 suites) in partnership with private equity firm KingSett Capital. The remainder of the top 10 list are also financial firms – including Canadian Apartment Properties REIT (CAPREIT), with 52,000 suites, Boardwalk REIT (33,000), Realstar Group (28,000), Hazelview Investments (22,000), Skyline Apartment REIT (18,000), Killam Apartment REIT (16,000), Mainstreet Equity (11,000), and InterRent REIT (10,000). In some communities, financial firms have effective monopolies over the local market.
Financial firms drive revenues through expansion – for example buying buildings – and by increasing fees and rents, which come from renters. Rents can be increased in a few ways – by charging annual increases to sitting tenants or applying for “above guideline” increases, in which the costs of certain repairs are passed along to residents.
The biggest gains, however, come when a longstanding tenant paying lower rent is replaced with someone new, who is charged top-of-the-market rent. This is permitted in provinces where rental tenancy legislation includes “vacancy decontrol” – allowing for maximum rent increases between tenancies. Firms capitalize on this with what they call “unit turns” or “turnovers.” During the COVID-19 pandemic in 2020, for example, CAPREIT “turned” nearly one-fifth of its suites (approximately 8,500 suites) and increased rents by an average of eight per cent (or $107 per month).
By systematically driving up rent prices, the business strategies of financial firms affect affordability. In Canada, 40 per cent of all renters pay more than they can afford. People earning minimum wage in 2019 could afford the average rent in only three per cent of Canadian neighbourhoods. The effects are felt by renters, who are more likely to be single parents, racially marginalized, new immigrants, people with disabilities and those living with fixed or low incomes.
According to urban planner Steve Pomeroy, for every one affordable unit created by government funding, approximately 15 become unaffordable due to the financialization of rental housing.
COVID-19 has worsened housing affordability for tenants. The health and economic impacts have hit lower-income and racialized residents harder, making it more difficult to pay rent. In 2020, rental arrears were up in nearly 60 per cent of buildings where there were arrears. One result has been a flood of evictions. In Ontario, despite various eviction bans, the Landlord and Tenant Board (LTB) has developed an online system, processing nearly 20,000 eviction hearings in November and December 2020 alone. When tenants are forced to move, they face much higher “asking rents” than in the apartments they left – on average at least 20 per cent higher in Toronto and Vancouver.
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Financial landlords, on the other hand, have thrived during the pandemic. CAPREIT posted “record performance” in 2020, with revenues up 13 per cent and $578 million in net operating income. In the first three months of 2021, Boardwalk REIT had already generated $130 million in profits. Minto REIT also delivered positive growth and raised rents throughout the pandemic. Starlight Investments bought and sold $8.9 billion in real estate. Many firms also profited from the record-low interest rates brought on by central bank actions. Firms were able to refinance debt to pay less, accessing very low rates backed by the Canada Mortgage and Housing Corporation (CMHC).
The post-pandemic plans for financial firms are to ramp up their activities. According to the Globe and Mail, a record number of apartment units are for sale in 2021, with financial firms bidding against each other to capture post-pandemic growth. As before, profits will come at the expense of affordability. Illustrating this, Minto REIT’s 2020 report promised investors that “the favourable fundamentals that existed pre-COVID-19 will return,” forecasting that “the housing crisis that existed prior to COVID will reassert itself” and “the housing affordability gap continues to grow and will ultimately benefit the multi-residential sector.”
Canada doesn’t need landlords that bank on an affordability crisis as their business model. To rebuild inclusive cities post-pandemic, housing must be treated as a home and not a financial asset. This will require bold action from policy-makers, to de-financialize rental housing, regulate markets for affordability and embark on a vast program of social-housing production.
Governments should take action to stop housing from being treated as a financial investment. Driven by activists frustrated by rising rent prices in Berlin, a referendum this fall could see the state expropriate properties from firms owning more than 3,000 apartment suites. Legal strategies to prevent finance capital from owning and hoarding apartments should be explored in Canada, too.
In the meantime, an obvious step is to eliminate preferential tax treatment enjoyed by financial firms, since these firms do not operate with a social purpose and should not receive state subsidies. As such, Canada’s housing agency, the CMHC, should stop providing access to preferential mortgage lending rates – an effective subsidy – to these firms. Similarly, loans and grants offered through Canada’s national housing strategy should not be accessible to financial firms, given that they eliminate affordable housing as a business strategy.
Financial firms capitalize on weak rent control and weak tenant protection laws. If policy-makers care about affordability, they will protect it with strong rent control, and eliminate loopholes like above guideline increases (AGIs), and vacancy decontrol. In addition, strong measures are needed to protect against eviction – including rent forgiveness for tenants affected during the pandemic and an immediate commitment to stop future evictions.
To truly solve Canada’s affordability problems, federal and provincial governments need to commit generous funding for the construction of new social housing and the acquisition of existing structures. This could be used to prevent the continued loss of affordable rentals to financial firms. To protect stock, governments could follow Montreal’s example and exercise the first right of refusal to buy multi-family housing – and then operate it as high-quality affordable housing. Municipalities (and other orders of government as well) can contribute existing publicly owned properties to land trusts, non-profits, co-ops or other social housing organizations for use as affordable housing.
Financial firms have not always owned rental housing, and their recent involvement in the sector is driven by what they can take from it, not what they can put in. With business strategies that are based on displacement and eliminating affordable housing, these firms have no place in progressive plans to rebuild inclusive post-pandemic cities.
This article is part of the Reshaping Canada’s Cities After the Pandemic Shockwave special feature.