Investing in Canadian Real Estate: A Complete Walkthrough
Updated: Feb 3, 2022
Canada has long been regarded as a hub of immigration and investment on the global stage. In recent years, major housing markets across the country from Vancouver, to Edmonton, and most notably Toronto, have flourished and grown exponentially, attracting investors both domestically and abroad. The stable history of the country's economy and consistent positive growth trends make the Canadian real estate market very appealing to many different individuals, whether looking to immigrate and occupy the property as their main residence,
citizens looking to purchase their first home, or for a stable and reliable investment.
Pre-construction condominiums, new home developments and mega-sized mixed-use commercial and residential ventures, all comprise the vast array of real estate investments opportunities available to potential buyers and investors. However, for many new investors, looking to enter an unfamiliar market can be daunting, so to get a better glimpse into the world of Canadian Real Estate Development, we sat down with renowned Private Equity Professional, finance banker, and President of 8608 Capital Group, Ardy Khavari.
Over the course of his fruitful career, Mr. Khavari has established and completed many illustrious projects in the city of Toronto from A to Z, by handling all aspects of the investment and development process in-house (from raising capital equity and debit and was kind enough to sit with us to lend his vast experience and knowledge.
Mr. Khavari, as an investment banker and Private Equity Professional, what are your responsibilities and obligations to your clients/investors ?
As a consultant/investment banker, our job is to deliver the results and profits we have promised to our investors, all the while minimizing their risks and maximizing their returns. All of the funds invested into the project will be allocated immediately to cover the costs (development, building, materials, etc.). However, one must understand that, whenever the overall risk is reduced, the overall returns will reduce as well. This is why we provide our
investors with returns in equity, while they enjoy the luxury and safety of assuming a debt position. Simply put, this means that from the beginning of the investment, the principal amount invested is secured by a charge against the deed of the project through an SPV.
What sets you and 8608 Capital Group firm apart from others offering similar investment opportunities?
In addition to all of the aforementioned steps, we ensure project success by assembling the most experienced and skillful team to execute all aspects of the project flawlessly. A detailed and accurate project Performa (completed by a trusted 3rd party) will also be prepared and presented to investors to further add to their sense of security and confidence. Large, world-renowned professional accounting firms will audit the project and provide bookkeeping services
to ensure finances are all in order from beginning to end. The auditing firm employed will always be one of the large trusted firms, an impartial third party that will objectively analyze all expenditures and returns to compile honest and thorough financial reports and keep us within budget. It is crucial for the project to have all of its own accounts, as this adds transparency and allows our investors to be able to track day-to-day banking activities and monitor the project's
The accountants' reports will also always be presented directly to the investors.
What factors should potential investors take into consideration when choosing where and how to invest?
When a high net worth investor is considering whether to invest in an equity or debt position, they must first understand one fundamental rule: a higher return on investment means higher risk in the investment, while lower risks will offer lower returns. These two elements (risk and return) are always corresponding, meaning that one can never increase their return while simultaneously decreasing the risk of their investment. If project is providing insurances or securities to the lender or investors, then we must also reduce the return on investment.
When there is a strong project underway in which the builders themselves already have a high amount of equity and the Performa projects high profits, the developer will be less likely to offer investors a high rate of return. Conversely, when a developer does not feel confident in the project or is not comfortable with fully assuming the risk involved, they will be more willing to share their profits with investors by offering them a higher rate of return to generate more funds for the project, reducingthe risk for themselves. Thus, whenever an investor sees that a developer is offering unusually high returns on their projects, this is usually a cause for concern.
The next point of focus for potential high net worth investors should be the actual team behind the project, those individuals who will be facilitating the development and building as well as managing day-to-day operations. One must be positive that the team executing the project is well-experienced, reliable, and has a proven successful track record. Working with a stronger, more talented team, the investor will likely incur higher costs, however this is not necessarily a bad thing, as this team will reduce the risk of the investment, and as mentioned before, with a lower risk comes lower return.
Another factor to consider is the actual Market Risks factor. Many investors have a bad habit of wanting to receive higher returns than what was initially offered when they see that the local real estate markets are performing at a high rate. This presents the danger of driving down and bankrupting the entire project, as it is important that investors always consider the initial return presented by the Performa in the beginning, not to have it increase or decrease based on current
market performance. As the market rises, it also has the potential to crash, meaning that if investors' returns were tied to the performance of the markets, there would so be the potential of them losing returns when the music stops.
What makes Canada a good choice for investment? Why is Toronto such a strong a city for investment?
Taking a look at the history of Canada's economy, especially in growing and mega cities (such as Toronto), one can see that even during the worst of economic times and world recessions, these cities did not suffer as much and continued to grow, or at the very least did not take a negative hit and experience a full-on recession. This is in contrast to many other large economies, including the United States, U.A.E., Portugal, and more recently Greece.
The Canadian economic and banking policies have always been set up in such a way so as to manage and mitigate risks efficiently. Coupled with the strict policies and controls enforced in the real-estate sector, the overall risk in investing into the Canadian market is very low.
Finally, the high rate of immigration to Canada is another driving force behind the strong investment opportunities and low risks available in the region. Canada is one of the safest countries in the world, and major cities like Toronto are sprawling urban metropolises, without the high pollution and crime seen in other similar-sized cities around the globe.
These larger Candian cities welcome new immigrants daily, from all corners of the world, including the Middle East, Eastern Asia and South America. These new immigrants are, for the most part, skilled/educated and arriving with capital to invest. Upon arrival into a city like Toronto, they have no option but to provide themselves and their families with shelter. The more affluent and wealthy immigrants will look to purchase a home around the city's downtown core, which sells today for an average price of $1.5 Million+. Otherwise they may look to rent or lease a property.
Either way there is always a steady demand for housing, which continues to grow, as every year the number of immigrants entering into Canada also grows. This is one the most important aspects of the Canadian Real Estate development - an increasingly strong international presence with overseas money being injected consistently into the market by new buyers from all over the world.
The valuable insights provided by Ardy Khavari offer a rare glimpse into the world of Real Estate from the viewpoint of an active and experienced Developer. The wisdom he shared is extremely valuable and helpful for anybody looking to better understand the processes and formalities involved in entering the Canadian Real Estate market.