Alberta Housing Slump Boosts Rentals in Boardwalk Win

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Kurt Kerschner, a 46-year-old electrical engineer from Austria, was ready to buy his first home after moving to Calgary with his family in the fall.

With the housing market in oil-rich Alberta at a standstill after the crude price crash, he’s now considering staying in the apartment he rents, concerned he may be stuck with a house he can’t sell should work dry up.

“Initially, we planned to buy but now we are not sure,” he said in a May 14 phone interview. “If you sell the property, maybe you can’t sell it immediately.”

Rising demand for rental housing is good news for Boardwalk Real Estate Investment Trust and Mainstreet Equity Corp., two of the western Canadian province’s largest apartment building owners.

As oil companies reduce capital spending and cut their workforce to weather oil’s biggest drop since 2008, economic uncertainty is driving demand for rental property. Home buying has slowed and prices have declined in Alberta’s largest city, boosting the appeal of renting for people such as Kerschner.

“We’re seeing a more modest number of people moving out to buy homes because of the challenge with their jobs,” Sam Kolias, Boardwalk chief executive officer, said by phone last week.

Energy companies including Suncor Energy Inc. and Royal Dutch Shell Plc. have cut jobs and canceled or postponed projects after oil lost half its value in less than a year amid a surge of oil production in the U.S.

Political Shift

Boardwalk’s funds from operations, a metric used to gauge a REIT’s profitability via the cash flow generated from their real estate, rose 11.8 percent to 85 cents a share in the first quarter as rents increased in Alberta and Ontario. That beat the 82-cent estimate of nine analysts surveyed by Bloomberg. Occupancy in Calgary and Alberta’s capital Edmonton, where the firm has half its units, remained above 98 percent, according to financial filings.

Average rents in Calgary, the highest among major Canadian municipalities, are set to rise 2 percent to C$1,350 in 2015 from last year, according to Canada Mortgage and Housing Corp., the national housing agency.

“On the ground in Alberta, we aren’t seeing much negative impact on the apartment owners,” Kevin LeBlanc, a real estate research associate at Dundee Capital Markets Inc., said by phone Wednesday. “Demand for rentals is still high and there hasn’t been a lot of supply recently.”

Short Supply

New homes and apartments will be in shorter supply in Calgary, according to CMHC. The agency said single-family housing starts will drop 4.5 percent to 6,400 homes in 2015 and multi-family unit construction will slide 24 percent to 8,000 units. The supply constraint means people are more apt to rent as they get priced out of the low-rise market or aren’t able to find the right home.

Fitch Ratings Inc. said the province’s home prices are 17 percent overvalued as the oil drop is set to further erode employment and weaken home buying.

Job cuts have prompted some workers to pack up and move out of Alberta, back to their home provinces in eastern Canada or British Columbia. Calgary’s vacancy rate will rise to 2 percent next year from 1.4 percent in 2014, remaining below the national average of 2.9 percent, CMHC data show.

Though Boardwalk’s shares have declined 2.9 percent this year, analysts predict a rebound. Bank of Montreal raised its rating to a buy on the Calgary-based company following results. Seven of 12 analysts rate the stock a buy. Boardwalk has gained 85 percent, including dividends, over the past five years, compared with a 50 percent gain for the Standard & Poor’s/TSX Composite Index.

The shares climbed 0.4 percent to C$59.75 at the close in Toronto.

Rental Revenue

Calgary-based Mainstreet’s average vacancy rate in the province, where it has 59 percent of its portfolio, declined to 5.2 percent in the second quarter from 8.4 percent a year earlier, while rent jumped 9 percent to C$1,024 a month, according to its second-quarter report.

Six of eight analysts recommend buying Mainstreet, a stock that’s lost 0.3 percent of its value this year.

The average price of a Calgary house dropped 0.6 percent in April over the prior month to C$494,200, the fourth straight month of price erosion in the longest streak since December 2011, according to the Canadian Real Estate Association.

This decline is not enough to prompt Kerschner to buy just yet.

“The price, in my point of view, is too high,” he said. “We may consider to continue with renting.”

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