How to “land” a great investment opportunity

There are different parameters that make certain asset classes attractive for investors, both institutional investors and retail investors alike.

At Amuka Capital, we have taken a deep dive into various key Canadian real estate markets and it is no surprise to us why MoneySense Magazine ranked Brantford as the best place to invest in real estate for 2018. (Source: https://bit.ly/2mni1d8_)

Our view is that when considering a land development opportunity, we like to first take a look at the macroeconomic factors and then we break down our analysis to the micro economic factors, such as the merits to the asset itself.

There are 3 main stages to the real estate life cycle, as follows: 1. Pre-Development (raw land, conceptual planning, rezoning) 2. Development/buildout (building permits, construction) 3. Developed/built (houses, condos etc.)

We are all accustomed to traditional built real estate as it is the most traded, most liquid, and least speculative type of real estate. Historically, land plays have been viewed as speculative and long term in nature but have usually seen the greatest profitability.

The relationship of land development to built out sites can be compared to what you see in terms of venture capital vs. publicly traded companies. Although publicly traded firms are generally considered more liquid, there is an argument to be made that the liquidity comes at a premium. For example, companies on the S&P 500 will commonly trade at 15-20x forward earnings. While they provide investors liquidity and generally stable returns over time, there is a definite premium being paid.

So why land development? Why Brantford?

History has shown that the 3 main macro factors that contribute to profitable land investment within a particular region are its jobs, people and housing starts. Let me explain…

If a region is seeing net domestic and foreign migration increasing and it is creating jobs for its residents and housing starts are shifting towards positive signs, there’s a good chance this region is on the up and up.

Brantford is seeing many of these signs and then some more…

Population growth for Brantford has seen gradual increases in rate growth every 5-year period since 1996 (see graph below). In recent years, we are seeing less people moving to Hamilton from Brantford. In terms of jobs, Brantford has steadily diversified its economy away from the downward trending manufacturing sector in favor of other performing sectors which are contributing to its job growth. Major transit improvements are anticipated to be completed before 2019/2020. Lastly, we are seeing extremely low vacancy in the rental markets both in Brantford and in Hamilton.

In the last year, we’ve seen the Canada Prime Rate increase .75% and the bank lending parameters get tighter and tighter. People view Brantford as a more affordable option to Toronto, and even to Hamilton. In theory, the housing market should grow due to their economic predictions, but the banks are making home ownership tough at this point and that is not getting any easier in our opinion.

The reality is, people are looking to rent in Brantford and the city needs to find creative ways to create supply for this demand.

As of right now, there are no hi-rise buildings being constructed in the multi-family sector near downtown Brantford. The city is noticing that there’s strong demand from builders and developers to get land rezoned for condo or stacked townhome use…but not as much for hi-rise sites. This is a result of builders not finding it profitable enough to make apartment buildings in light of the 17-year bull run we just experienced.

As a response to this, the city is offering kickbacks and incentives to builders who can create rental supply through hi-rise sites and they are motivated to approve rezoning applications to help move the site plan approval stage further along. This will in turn create a more competitive market for site plan approved hi-rise sites.

This is not the case in the GTA and other larger cities where the market is saturated and costs for development have gone to unhealthy levels, thereby making it nearly impossible to create sustainable rental supply with any sort of profit margin to the builders/developers.

Amuka Capital is currently bullish on the downtown Brantford market. We see the support from both the city and planners in bringing rental supply to the market. It is our firm belief that the time to acquire prime sites in Brantford with a rezone focus is now since you can acquire sites with minimal to no competition from larger institutional players who focus on larger markets such as the GTA. Land pricing overall and construction costs are cheaper than the GTA and we believe that diversifying some dollars from the GTA to Brantford is a sensible investment strategy.

If you would like to learn more about investing in Brantford or exclusive real estate development opportunities, you can reach me at [email protected]