How Forvest manages real estate assets and investor expectations
Forvest Financial Services Corporation is the Canadian representative office of the Forvest Group, a wealth management organization based in Geneva. We spoke with Rob Wollach, Director at Forvest Financial Services Corporation in Toronto. Rob manages all the investments of the Forvest Group in Canada, the US and Australia.
FULLER LANDAU: What is Forvest’s primary focus when it comes to real estate?
ROB WOLLACH: Forvest is focused on long term wealth preservation and diversification, making real estate the most popular asset class for our international investors. The value can be maintained and good investments can make it through the ups and downs of economic cycles.
We are modernizing our approach to real estate investment, such as improving the quality of the reporting for our investors. As well, quantifying the administrative burden of international investing is more of a concern today, not just on the part of the investor, but also for the wealth manager because of administrative variations in foreign countries. There’s more paperwork and more technical legal, accounting and fiscal expertise needed, which becomes expensive for international investment advisory services.
For European investors, North America provides a faster route to leveraging money in real estate. Development timelines are shorter than in Europe. There’s more land and more growth. At the same time, there’s more fear from European investors regarding the volatility of real estate values in North America due to the recent history of the US markets. Many of our investors wanted to get into Florida, and then the recession happened. On the other hand, Canadian real estate has been some of the best-performing real estate that our investors have because it has not suffered like some of their US assets.
FULLER LANDAU: Has it been a steady rise when it comes to Canadian real estate investments?
ROB WOLLACH: Yes. The capital gains on Canadian real estate have really helped our investors. When you look at the cap rates of, say, downtown Toronto, they seem low to our investors. We tell them 5% and 6% cap rates are hard to come by south of Highway 401 in Toronto, which is the core of the city. Despite that, investments in that area are solid and do not trade frequently.
We also have a real estate portfolio in a smaller town in Ontario, which our investors would never have heard of if it were not for us. Cap rates in smaller towns can reach 7% and 8%. In reality, it was a better investment than buying the same amount of real estate in downtown Toronto. However, cap rates do not tell the whole story. There are other factors that play into value.
Local data and intelligence is becoming more and more important as investments become more global. Particularly for our younger generation of investors, the data is very important. We can collect much more data today as compared to only five years ago.
The steady rise of prices in Toronto can make investors uncomfortable because they think the tide will turn soon. We overcome investor nervousness by providing robust market information. Values are still going up, in part because of immigration putting pressure on supply and demand, but no one is looking at Toronto’s immigration numbers in Geneva. Plus, the housing market here is separate from the condo market, which is separate from the commercial and industrial markets, but they all get bundled into one big spreadsheet.
The Toronto market is quite unique. Toronto is now officially the third largest metropolitan area in North America after New York and LA. Typical real estate investing cycles do not apply quite as easily to New York, and I believe Toronto is in that same situation, which bodes well for foreign investors.
FULLER LANDAU: What have you seen in terms of trends over the last five years with Forvest’s real estate investments?
ROB WOLLACH: It is more competitive in rural Ontario because small towns are vying for fewer large tenants. Most of our assets on the rural side consist of commercial, industrial and medical properties. Given that we represent small, private high net worth investors, we are developing a more sophisticated approach to those portfolios to preserve value.
For our commercial tenants, we look at additional rents and common area maintenance (CAM) fees, and how these factor into the profitability. Some use more water, electricity and/ or heat. To recover expenses, we must define them clearly in their leases. Therefore, leasing has become more technical, and the wording is focused on protecting landlords’ interests.
On the other hand, tenants’ negotiation skills are improving due to the professional advice they are receiving, so we have to explain and defend our terms clearly during lease negotiations.
FULLER LANDAU: What about your real estate investments in the US?
ROB WOLLACH: We sold most of our real estate assets in the United States five years ago. By 2011, we had only a few holdings left in Florida. We have not made any new investments in US real estate since. It’s not so much tied to the economic environment as it is to the regulatory environment.
The American Foreign Account Tax Compliance Act (FATCA) creates problems for foreign investors. Even though it was designed to make it more difficult for US taxpayers to conceal assets held offshore, it puts pressure on all financial organizations due to the compliance issues.
The agreement between the US Department of Justice and Swiss financial regulators makes it a big administrative hurdle for our investors wanting to tap into the US market. Foreign investors who invest in rental properties in the States have US tax filing requirements regarding rental income earned, and any capital gains earned on the sale of these properties.
You must face how much time and money you will spend structuring your investment, repatriating your profit, and managing the regulatory component not only domestically, but also in the US. That’s what has prevented us from investing in the US again.
Canadian investors, due to their proximity to the US, are not your average foreign investor, but for anyone else, it’s trickier.
FULLER LANDAU: Do you foresee redevelopment opportunities in the market within the next couple years?
ROB WOLLACH: In certain parts of Toronto, areas going through gentrification offer good residential and commercial investment opportunities. One issue we have encountered recently is if you tear down a building in one of those pockets, the city enacts its clawback bylaw. In other words, the city would take back feet to widen the adjacent laneway. No investor wants to lose land. The other alternative is to work within the confines of those brick walls.
It’s delicate for the investor because a renovation has risks. With a reno, you quickly approach the price of a rebuild, so then why not do a rebuild? Then you’re dealing with the clawback again. Despite that, I do think the opportunity is there, because the rents that I see in those pockets are close to what new construction goes for.