Viridian Green

The Viridian, also called Viridian Green, is a four-story strata, 22-unit, townhouse development along the south side of 4th just east of Alma. The name Viridian Green is redundant. Viridian is a colour near identical to green.

This project was plagued with a number of problems and construction completion was delayed until after the expected summer 2008 completion, which itself was a delayed date.

Larc Developments is the developer. Larc is privately owned and does not publish financial statements nor release public information.

Construction has now ground to a near halt, with the building appearing about 80% complete, including the interior construction of commercial businesses on the ground floor.

We understand that the developer has placed all unsold units with a 3rd party for sale.

Construction risk is high.

Financing risk is high.

The building is concrete and appears to be designed with full rainscreening. However, the operation of large commercial businesses on the ground floor and the use of not-proven building components create above average operational risk in the first year of occupancy.

Price risk is high. At present, units are being offer for about $819,000 to $1.2 million. These units are significantly overpriced compared to similar product in the neighborhood.

Environmental risk is average.

Recommendation: Pass. For existing owners, we suggest ensuring any deposits are safe and negotiating an exit alternative.

The Santa Barbara

The Santa Barbara is located on the north side of 4th Ave., about 2 blocks west of MacDonald.

This is a strata development which has three levels, including one below grade. There are several unit sizes available.

There is no construction nor financing risk as the project was built in 1998.

As is the case along the west coast, prices at this project are down at this project.

A two-bedroom unit listed for $599,000 in May and sold shortly thereafter. A near identical unit recently listed for $515,900 and has been repriced for $499,000 after not selling. A one bedroom unit likely peaked at $499,000. A one-bedroom unit recently listed for sale at $429,000 and has been reduced to $384,000 after not selling. Price risk is average for similar product in the same neighborhood.

Maintenance fees in this project are higher than average for this type of product. And owners are renovating units in the first 10 years of ownership. North facing units experience higher than normal levels of road noise. Operational risk is higher than average.

We were unable to assess rainscreen capabilities, however the building is rainscreened. Environmental risk is average.

Recommendation: Buy*, with the exception of below grade, and street facing units.

*Recommendations are general in nature. Specific recommendations are based on unique investor requirements and profile.

Other Factors to Consider

"Housing slump deepens as prices drop most in 26 years", reads the headline in today's Globe & Mail in reference to the Canadian housing market

Price is certainly a factor in making home and investment decisions, and the decline in house prices across Canada is big news. However, price should not be the only decision in buying or selling.

The key factor in making decisions should actually be what your objective is with the property under consideration. Is it a principal residence, an investment, a retirement residence etc?

A second key factor is how much it costs to carry the property, including the mortgage, taxes, other fees etc. Lets say you have a property that is dropping in price but has a very low mortgage rate of say 4.5% good for 7 years. Selling that property, but then buying it back in 5 years for $100,000 less may end up costing you more if the best mortgage then is 9%.

There is a new consideration which also may impact on today's decision. Ten years ago, banks provided only token home-equity loans. But five years ago, home equity loans became easy to get, at very favourable rates. But those loans have all but dried up today. However, some people who got their loans over the past 5 years have huge available lines of credit, at rates that are very low. Rather than selling a property to pay off other debts, it may be advantageous to rely on the line of credit in the short term.

Real estate is a long term business decision. And there are a lot of factors to consider.

The Impact of the Athletes Village on The Market

The City of Vancouver disclosed this week that is has provided a financial program, which is called a "$100 million loan guarantee", to Millennium Development Group, developers of the 2010 Olympic Athletes Village.

The details of the program have not been released.

Supporters of the program claim that the city and its taxpayers are protected in the case that Millennium is unable to pay back the "loan".

Those supporters are referring only to the direct risk of a loan default. If Millennium can't pay back the loan, then Vancouver recovers by way of taking back property. Its called realizing on the security. "No risk," those supporters claim.

Wrong.

The total financial deal for both land and buildings has a book value of $1.1 billion. Most of the financing was provided by Fortress Investment Group, through its lending subsidiary Fortress Capital, by way of a $750 million loan. The supporters of the $100 million loan have conveniently ignored that Fortress must be paid back the $750 million BEFORE the city can realize on its security, which are the land and buildings. In addition, part of the security are buildings and land the city was going to get anyway - at least 100 units of affordable housing plus green space.

So there is a direct risk to the city of Vancouver. The risk is that the $1.1 billion dollar project is worth only $750 million at completion, a very real risk, and after Fortress gets paid, the city gets nothing. In addition, as part of the original deal, the city is on the hook for up to $190 million in shortfalls to the $750 million Fortress is owed. So if after everything is sold, Fortress gets only $600 million, then the city kicks in $150 million more, and loses the other $100 million.

But there are also two indirect risks to Vancouver taxpayers and investors that have yet to be disclosed.

First, only 265 out of 700 condo units have been presold. The total number of condo units eventually available for sale appears to be about 1,000. Those 265 pre-sales must be considered a VERY low number in a real estate market which is stagnant. Even more worrisome is that we are convinced that at least 50-75 of those pre-sales were likely made to what are called "related parties", such as sub-contractors. Those sales were conditions of the sub-contracting agreements, in some cases sweeteners to agreements because the contractors figured they could flip the property for a quick profit. Those sales must be considered very soft with little likelihood of closing. So the city of Vancouver may well realize on security, but simply get 3 empty condo buildings. And cities aren't good at managing such assets.

The second risk is to investors and home owners. If the city realizes on security and gets 600 empty condo units to sell, it will have to sell them at fire sale prices. It will take a year or more, with huge downward pressure on prices.

Millennium Water will be a work out project in about two years. Similar work outs take anywhere from 2-5 years. We recommend a pass on this project, at this time.

Sales & Prices Fall But By How Much

The Real Estate Board of Greater Vancouver reported sales activity for October, 2008. As is consistent with the Board, disclosure is clouded by the use of multiple metrics, not standard, and not easy to compare from one reporting period to the next. Below, the black text represents the Board's most recent press release, the red text represents previously released Board information, and the blue text represents our analysis.

Sales Volume

Residential property sales in Greater Vancouver declined 55 per cent in October 2008 to 1,364 from the 3,028 sales recorded in October 2007.



Benchmark Prices for Detached Properties

The benchmark price for detached properties declined 4.7 per cent from October 2007 to $695,962. Since May 2008, the benchmark price for a detached property in Greater Vancouver has declined 9.8 per cent.

The last three immediately available benchmark prices provided by REBGV are $920M in spring 2008, $808M in early summer 2008 and $726M in September, 2008.

We calculate that the price decline from the peak in spring 2008 ($920M) to October 2008 ($695M) to be almost 25%.


All Market Price Changes

The Real Estate Board of Greater Vancouver (REBGV) reports that residential benchmark prices, as calculated by the MLSLink Housing Price Index®, declined 8.8 per cent between May and October 2008, resulting in a 3.9 per cent year-to-date price reduction for detached, attached and apartment properties in Greater Vancouver between Octobers 2007 and 2008. In May 2008, the overall residential benchmark price was $568,411, compared to $518,668 in October 2008.

In September, 2008, the REBGV reported that the price was $557,114, down from about $580M in September, 2007.

We calculate the price decline from September 2007 to October 2008 to be about 11%.