On purpose built rental construction. Federally backed. Below market fixed rates.
PV, Mit & Jeff
Federal, municipal, provincial. The full incentive stack and why it is a window.
If you missed yesterday's deep dive on the spread trade, the short version: development returns come from the spread between what we build for and what the stabilized building is worth.
Today we focus on the other half of that equation: who is paying for the build.
The answer is going to surprise most retail investors. It is not us.
The Canada Mortgage and Housing Corporation will lend up to 95% loan to value on purpose built rental construction projects. At fixed rates well below conventional commercial rates.
Read that again. 95% LTV. You cannot find that financing structure anywhere else in real estate. A buy and hold investor purchasing an existing apartment building can get 65 to 75% on a commercial mortgage. A purpose built rental developer can get 95% from CMHC.
Why the gap? Because CMHC is not a normal lender. It is a federal Crown corporation with a public mandate to incentivize rental supply. Canada is structurally short rental housing. CMHC is the federal lever for fixing that.
Then the municipal layer. Cities like London (where Wellington Towers is being built) are waiving development charges on purpose built rental projects, reducing build cost by tens of thousands of dollars per unit.
Why? Because cities have the same housing shortage problem at the local level. Waiving development charges is the cheapest, fastest way for a city to get more rental product built.
Municipalities across Ontario are pushing for purpose built rental development right now. The support flows directly into project economics, which means it flows directly into investor returns.
432 Units · 25 Storey Purpose Built Rental · London, ON
$100K Minimum · Cash Only · Accredited / Existing FC Investors
Targeted Return: 20% to 24% Annualized
Provincial governments are layering on top of CMHC and municipal incentives:
→ HST rebates for purpose built rental construction
→ Workforce training credits
Each piece on its own is modest. Combined with the federal and municipal layers, the total incentive stack on a purpose built rental project today is materially larger than what you would get on a condo or any other real estate asset class.
The government is essentially saying: if you build rental, we will partner with you on the cost.
Canada is short approximately 3.5 million homes by 2030 according to CMHC's own projections. The federal government has identified rental supply as a structural priority. Provincial governments are matching with their own incentives. Municipalities are competing to attract rental development.
This is not a permanent state. This is a window.
Incentive programs change with policy cycles. The current structure is unusually favorable to rental developers. Whether it stays this way for the next 4 years (the duration of Wellington Towers) is one thing. Whether it stays this way for the next 10 years is unknowable.
What we know with certainty: the projects we underwrite today get the current incentive stack locked in. CMHC financing, once approved, is fixed for the construction term. Municipal grants, once committed, are committed.
8 Stabilized Apartment Buildings · Southwestern Ontario
$10K Minimum · RRSP / TFSA / RESP / LIRA Eligible
Targeted Return: 15% Annualized
Current unit price: $13.40
You are not just investing in real estate. You are investing in a project that is being subsidized at the federal, provincial, and municipal level because Canada needs rental supply more than it needs almost anything else right now.
That subsidy translates directly into return on equity. The same project, built without the incentive stack, would have a fundamentally different return profile.
It is the right time to be a developer of purpose built rental in Canada. Whether it remains the right time five years from now depends on policy. Today, the structure is here.
To your success,
PV, Mit & Jeff
P.S. CMHC pre construction financing has a 6 to 9 month underwriting window. Wellington Towers is past that gate. Future projects will need to go through that approval process from scratch, which means their financing terms will be set by whatever the policy environment looks like at that time. Locking in today means locking in today's terms.
