Financial feasibility of purpose-built rental in Canada

Key findings

The results point to financial feasibility challenges for new private rental apartment projects in the 6 selected markets. Land costs, government charges, and underground parking construction costs constitute some of the significant cost items hindering financial performance. Achievable market rents are also generally not high enough to support development costs in most markets.

Part of the financial feasibility challenges found by comes from the discrepancy between achievable (i.e. market) and required (i.e. economic) rents in all the markets examined. Economic rent is the rent required to obtain a cash-on-cash return of 10% over 10 years. The report show the differences.

Market rents are rarely sufficient to cover the development and construction costs of projects.

Traditional financial performance indicators do not support the development of private-market, purpose-built rentals. This was seen in the 6 Canadian markets studied: Vancouver, Calgary, Winnipeg, Toronto, Montréal and Halifax. This suggests that developers are using other criteria, or that non-traditional developers (such as REITs and pension funds) are driving growth.

The study looked at 3 types of housing projects:

• basic
• mid-end
• high-end

There were 4 financial performance indicators studied:

• cash-on-cash return (including principal payment)
• internal rate of return (levered, 10 years)
• margin on costs
• yield on cost (return on cost)

This document is part of the Research Insight series, under research priority area Housing Finance. Funding programs can be found here.

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Research Insights are summaries of our research reports. These insights:

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• present major findings of the research

The research presented in this series explore the areas of Housing Need, Housing Finance, Housing Supply and Outcomes of the National Housing Strategy.

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