The Real Deal

BC Business

Real estate is booming, so why are so few developers on the Top 100 list of B.C.’s biggest companies? Mainly because revenue, our basis for ranking companies, is one bit of information few developers are willing to disclose.

But it also has to do with how the revenues of development companies are calculated. Residential developers – the most obvious candidates to rank among the major corporate players in the province – typically don’t receive the majority of sales revenue from pre-sales until a project completes, explains Lizette Parsons Bell, spokesperson for Concert Properties Ltd.

While revenues on pre-sales are locked in with the purchaser’s deposit at the start of a project, purchasers only begin making payments upon completion – and only then do revenues start to appear on the developer’s balance sheet.

Home completions throughout the province dipped slightly in 2007 after rising steadily from 2001 to 2006. For Concert that translated to a drop in revenues from $255 million in 2006 to $188 million in 2007.

That’s not quite enough for the union-owned developer to make it onto this year’s Top 100. The drop came in spite of an aggressive development program for Concert: it’s currently developing more than 400 units in B.C. and is planning a further 420 starts for 2008 in both Vancouver and Toronto, with additional projects in the initial planning stages. It is also steadily increasing its portfolio of investment properties.

Meanwhile privately held Polygon Homes Ltd. saw its revenues surge last year to an estimated $450 million, from approximately $375 million two years earlier (the company, which participated in the Top 100 two years ago, declined to participate last year but submitted figures again this year). By contrast, Wall Financial Corp. (WFC-T) placed on the list as revenues rose more than 80 per cent last year to $301.2 million – thanks to the completion of units in its Yaletown Park development as well as the Hudson on Granville Street, among others.

The yearly variations in revenues mean rankings for real estate companies can vary wildly (this year’s absence of Concert from the list being a case in point). It also means some companies choose to abstain altogether, because revenues are not necessarily an accurate reflection of economic importance when stacked up against companies in sectors that generate more stable cash flows. “[Revenues] all come in bursts,” says Hani Lammam, vice-president of Cressey Development Corp. “It’s definitely very staggered: it’s not steady, not as in a typical manufacturing or sales-oriented business.”

But Lammam says the majority of developers in B.C. – one thinks not just of Cressey, but also Aquilini Investment Group, the Bosa and De Cotiis companies, Jameson Development Corp. and others – are family businesses not keen on attracting attention to finances. “It becomes a very private matter,” says Lammam.

On the other hand, those within the industry generally know where competitors stand because the economics of the industry don’t vary much between developers, and there’s a general understanding as to how many units each developer is juggling. “I think we know what everybody does and how much volume they do,” says Lammam, noting that Cressey completed 1,400 units last year. “From that it’s easy enough to ballpark the [revenue] figures.” Cressey’s volumes put it among the top five privately held developers in the province, Lammam says, though the top five fluctuate from year to year. And he adds that, with revenues from commercial developments and investment properties, there’s an added unknown in accurately pinpointing the revenues for many developers.

Overall profit (or loss) for developers is another question. High financing costs, the momentum of years of aggressive construction cost increases and the cost of doing business in a tight labour market mean many real estate companies are reaping smaller returns than ever before from development activities. Simply put, many developers are seeing narrower margins on the units they’re building or are having to introduce sales campaigns that pace sales to reflect the increased cost of doing business. Rather than enjoying a boom in profits, industry insiders say that profits have been decreasing relative to where they were a decade or two ago. A few highprofile examples that failed to balance sale prices and construction costs have stalled or shut down completely.

While it’s standard for members of the Urban Development Institute to budget a 20 per cent profit to allow for higher-than-expected expenses, institute executive director Maureen Enser says that a realistic profit margin these days is between eight per cent and 14 per cent. “The profit margins aren’t as astronomically high as people would think,” she says. “It’s a tough business.” Lammam agrees, noting that Cressey saw the completion of two projects delayed until this year because of a lack of skilled workers. While management of future projects and contracting practices will be reviewed to ensure such delays don’t happen in the future, Lammam indicates the problem is widespread. “There’s so much activity,” he says, “and a shortage of labour – a shortage of skilled labour – is causing significant delays in our projects.”

The challenges seem set to persist for some time, given the strength of the local construction market. While the Canada Mortgage and Housing Corp. (CMHC) (AND-T) expects housing starts across the province to drop 15 per cent this year to 33,000 units, down from 39,000 last year, a total of $8.6 billion worth of residential building permits representing 40,830 authorized units were issued last year. That’s a 12.8 per cent increase over 2006, which bodes well for 2008.

Indeed, Cressey’s Lammam dismisses the bearish rumblings in the media, arguing that B.C. is not Ontario nor is it the U.S., where foreclosures continue to mount. While affordability has taken a hit, with sales of new homes slower than they were a year ago, this is largely due to the impact of cost increases that have boosted the price of new homes to around $600 a square foot. That said, Lammam notes that first-time buyers continue to account for about 35 per cent of the market. “Our market is very, very strong,” he says. “The people who are active see very robust times.”

Cressey, for its part, hopes to launch close to 650 new units this fall – in Vancouver, Kelowna, Richmond and Coquitlam – though most of those units probably won’t go to first-time buyers. Instead they’ll go to those already in the market who have benefited from year-over-year growth in house prices. The double-digit appreciation of past years may be over for the time being, but, with annual appreciation rates running in the nine per cent range, CMHC analysts still consider the market to be prime territory for vendors.

“That’s remarkable,” Lammam says of the nine per cent increase, “especially when you consider most people don’t own their real estate outright, so they’re actually making that nine per cent multiplied by four when you consider how much down payment they have. The market is still very strong.”

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