PV, Mit & Jeff
Most retail investors think the return on a development project comes from real estate appreciating over time. It does not.
Where 20 to 24% annual returns in private real estate development actually come from.
If you want to understand why purpose built rental development can target 20 to 24% net annualized returns when the underlying real estate market grows at 4 to 6% a year, you need to understand the spread trade.
It is the most underexplained mechanic in private real estate investing. Today we walk through it.
A development fund builds a building. The total cost to build that building is one number. The market value of that same building, fully leased and stabilized, is a different number.
The difference between the two is called the spread.
The spread is what creates the return. Not appreciation. Not market timing. The spread.
Driven by NOI from 432 leased units
With CMHC funding 95% of the build, the equity required from investors is a small fraction of the total. The same dollar of spread, divided across a smaller equity base, produces a higher return on equity.
That is why the math works.
ONE. Construction efficiency. Cost certainty on materials, labor, and timeline. A project that comes in on budget keeps the spread intact. A project that runs 20% over budget gives away half the spread. Wellington Towers is being built using precast concrete construction, which significantly reduces this risk. Components are manufactured offsite under controlled conditions, delivered ready to install, and reduce both timeline variance and material waste compared to traditional cast in place builds.
TWO. Lease up speed. A 432 unit building that takes 6 months to lease versus 18 months produces materially different stabilized values. Wellington Towers will be rented significantly below market on purpose, approximately $1,500 per unit vs $1,800 prevailing in London. We trade a small amount of unit level rent to capture the much larger value of hitting stabilization fast. Faster lease up equals higher cap rate based valuation at exit.
THREE. Selling at stabilization. Our exit happens once the building is fully leased up, not after years of operating. The cleaner and faster we can hit stabilization, the higher the institutional buyer pool we can sell into and the better the price they pay. The spread is captured at the moment of stabilization, not stretched across years of holding.
432 Units · 25 Storey Purpose Built Rental · London, ON
$100K Minimum · Cash Only · Accredited / Existing FC Investors
Targeted Return: 20% to 24% Annualized
Wellington Towers is our first ground up development project as Foundation Capital. We are upfront about that. Which is exactly why we partnered with people who have built this product many times before.
Construction on Wellington Towers is being led by experienced builders and development managers who have delivered purpose built rental towers at this scale before. Our role is to raise the capital, oversee the project, and apply our operating expertise to the lease up and stabilization phase.
So investors are getting two layers of track record on a single project:
→ Construction execution from partners who have built this exact product type at scale.
→ Operating execution from us. 8 stabilized buildings inside FCPRET. 18 buildings total across the FC family. 350+ units under active management.
The spread is not the same thing as appreciation.
If you bought a stabilized apartment building today and held it for 4 years, you would get appreciation. Cap rates compress, rents grow, NOI grows. That is the buy and hold play. Maybe 8 to 10% annualized.
The development play is different. You are creating an asset that did not exist and capturing the value the act of creation produces.
Different mechanic. Different return profile. Different role in a portfolio.
8 Stabilized Apartment Buildings · Southwestern Ontario
$10K Minimum · RRSP / TFSA / RESP / LIRA Eligible
Targeted Return: 15% Annualized
Current unit price: $13.40
If you are evaluating Dev Fund II, the question is not "will real estate go up." The question is "do I trust this team to capture the spread."
That is a different question with a different answer. If you have been with us since FCPRET inception, you have watched the team capture similar spreads at smaller scales. Wellington Towers is the same playbook scaled up.
To your success,
PV, Mit & Jeff
P.S. The most asymmetric thing about the spread trade is that the downside scenarios still pay. Underwrite Wellington Towers at 350 units instead of 432. Underwrite at slower lease up. Underwrite at lower exit cap rates. The numbers still work. That is the structural margin of safety we built in. Tomorrow we go into who is paying for the build.
