GWLRA Considers the Impact of Revised Ontario Rent Control Legislation

Background: On April 24, 2017 the Province of Ontario introduced changes to the Residential Tenancy Act.

The largest impact for GWLRA is that rent control will be expanded to all rental units effective 20 April 2017. Previously, units in buildings constructed after 1991 were exempt. Under the proposed (and anticipated) legislation rental increases will be pegged to the rate of inflation to a maximum of 2.5%.  In 2017, the allowable increase will be 1.5%. Rent control does not apply to vacant units, which landlords will be able to rent at market rates.

These changes apply to all rental units, including condominium rentals. Indeed the larger impact may be on the condominium rental and investor marketplace.

Implications for Existing GWLRA Assets under Management

GWLRA’s analysis of the implications for our clients (and residents) has only just begun, as has the analysis of other industry watchers and experts. It is too soon to know the full implications.  Here we share some of our preliminary thoughts based on our experience, research and analysis.

GWLRA manages 11,000 multi-family units across Canada, with 7200 units located in Ontario. The legislative changes impact only three of these buildings as they were constructed after 1991, and another 1,100 units that are currently under development. GWLRA is actively evaluating the implications for the investment return profile of these projects.

Rental growth on renewals: For GWLRA’s assets built after 1991, rental income growth over the past 5 years has seen average increases for existing tenants below 2.6%. Going forward, the buildings that achieved rental growth higher than inflation could see rental income growth slow modestly, however this will depend upon the rate of suite turn over as well as the state of the local rental market. Implications for returns will depend upon whether capital and other expenditures can be kept at or below inflation as well as whether through the AGI (Above Guideline Increase) process any extraordinary capital expenses can be passed along to tenants. We also note that should inflation exceed 2.5%, rental rate increases will not be allowed to match the rate of inflation. Although we do not anticipate such high inflation in the short-medium term, this does present a longer-term consideration when investing in this asset class.

Turnover rates: Important to investment implications is whether turnover rates will remain the same, or decline. If they remain the same or increase, this will mitigate the impact of rent controls for existing leases somewhat as rents on vacated units can be reset. However, rental income could slow to a greater degree if turn-over rates decline–which could happen if vacancy rates plummet in response to continued strong demand growth against reduced–or even negative–supply growth, which in turn could happen if owners of rental condominiums sell and/or the supply pipeline for new rental halts as developers wait to see the impact of this legislation on returns.

Implications for New Developments

For developments under construction, we anticipate reducing our rental rate growth assumptions modestly in the years following stabilization (full occupancy or near-full occupancy). It is possible that initial rents will be higher than originally forecast if vacancy rates plummet in response to continued strong demand growth against reduced–or even negative–supply growth.

For future developments, our income growth assumptions have similarly been reduced; meanwhile we are also exploring different scenarios for achievable rental rates on lease up with some anticipating higher rents owing to supply restrictions, and others assuming a more balanced market.

For multi-residential land sales although it is too soon to know, we currently anticipate that this new legislation will slow down the pace and price escalation of residential land sales. Developers of both condominiums and purpose-built rental will likely take a break and watch how the first few quarters of rent control impacts condo pre-sales, as well as the turn-over of rental-condo units to owner-occupied units and the turn-over rate at purpose-built rental buildings. Over the medium-to-longer term, we anticipate that the seasoned apartment developers and investors, including those backed by institutional capital such as GWLRA, will continue to find land and build rental apartments in locations where the land costs and achievable rents allow for a required investment return. Groups with less experience will likely not venture into this product type.

Early Days

GWLRA intends to continue analyzing and monitoring the implications of this legislation and will reach out to clients and stakeholders with updates as new information becomes available.

Note: Ontario’s rent control differs from those in other provinces: British Columbia’s rent control is based on the formula of “CPI + 200 bps”—inflation (the Consumer Price Index) plus 2 percentage points. For 2017 the allowable increase is 3.7%. In Alberta, rents can only be raised once per year, with three months’ notice, however with no limit.