We’ve all heard the news — there is an increase in the number of pre-construction projects being cancelled. Why is that? In today’s blog post, I will be talking about this issue and delve into the reasons why this situation is arising more frequently than we would like.
Half a year ago, I spoke with a developer. He mentioned that he anticipated an increase in the number of projects being cancelled. The first reason that comes to mind naturally would be: developers are getting greedy, and with the trend of increasing condo prices, all they are thinking about is profit, profit, and more profit, which leads to their demise. However, the reason for cancellations are more complex than one would think.
When I choose to work or invest in a developer, I always choose to invest in one that has a long, established history in Toronto real estate. “Why is that so important?”, you may ask. I’ve listed the reasons I believe in this so strongly.
1. Lack of Communication with Government
Newer developers who lack communication with the government tend to face many more challenges when it comes to zoning and the approval of the building. The later the permit is approved, the greater the uncertainty of cost weighs down on the developer. If development charges are not able to be locked down, the prices of materials cannot be confirmed either. Experienced developers will be able to avoid these issues with their good reputation with the government.
2. The Depreciation of the Canadian Dollar
Developers are going crazy over the import prices of materials globally. The depreciation of the Canadian dollar means that there is a higher chance of developers losing money from the exchange rate alone from purchasing materials to build infrastructure. That alone is a big deal. However, more established developers have a greater network of import connections and financial options that will minimize their losses with the depreciating loonie. This means that they usually are able to avoid miscalculation, making their project more feasible, and thus lower the risk of their project being cancelled.
3. Miscalculation of Cost
Again, it’s about the money. Newer developers tend to miscalculate costs, which results in them losing time rectifying their mistakes. Now, no matter how great a developer is, they will take loans from the bank due to taxation purposes. What does that mean? With the time lost in re-adjusting their costs and fixing their calculations, the bank interest is going to be a big problem with their cost of production. Sadly, because of that, newer developers tend to have higher risks in terms of solidifying their project, making it more prone to cancellations.
4. Cost of Land
Developers with a longer history of experience tends to build communities with a master plan instead. This means that instead of purchasing a smaller piece of land for one or two towers, they purchase a large piece of land to build on. Then, they collaborate with other corporations and with the government in joint ventures to build a community for potential residents. For one, this means that they will definitely not buy a piece of land at over it’s value. Most importantly, it solidifies their plan and makes it much more feasible to carry out their project due to the support from their partners.
Fun fact: I met a Russian developer on the plane, and his family had been in the developer scene in the GTA since the 1990s. They chose to opt out of the GTA market due to the high risk and uncertainty costs in the GTA, as well as the significant increase of land value in Toronto, and chose to go to the Southern part of the USA instead!
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