Canada's Housing Bubble

Mar 01, 2010 Christopher Donville and Chris Fournier  Bloomberg

Sidney Crosby’s overtime goal salvaged the Canadian national hockey team’s Olympic gold-medal aspirations. Vancouver may have to count on him now to help sell condominiums to avoid a credit-rating cut.

Canada’s third-biggest city is responsible for C$700 million ($665 million) in financing for the luxury condominium development used by Olympic athletes such as Crosby. The city needs to sell 474 units for as much as C$10 million each to recoup its lending and avert a possible credit rating cut. The athletes’ use of the condos overlooking False Creek is part of the city’s sales pitch.

“The exposure of the Olympics have been massive, the best possible marketing campaign to have, particularly for the village,” Mayor Gregor Robertson said in an interview on Feb. 27. “We have a very good chance to see the village sold out within about two years.”

Robertson is seeking to avoid a repeat of Canada’s last Olympic-financing fiasco: The 1976 Summer Games in Montreal, which left Quebec with C$1.5 billion of debt that took three decades to repay. Vancouver’s costs may increase depending on how long it takes to sell the units and recover the city’s investment, city officials said.

Vancouver was forced to finance the project after New York- based Fortress Investment Group LLC withdrew support in late 2008 after losing confidence in Vancouver-based Millennium Development Corp., the project’s developer, amid construction- cost overruns and the effects of the global recession.

Rating Cut

Crosby, the leading goal scorer in the National Hockey League, scored 7:40 into the extra period to give Canada a 3-2 victory in Vancouver over the U.S., giving the host country its record 14th championship of the Games.

Standard & Poor’s cut Vancouver’s debt rating a year ago to AA from AA+, citing heightened risks related to the C$1.1 billion ocean-side development. Moody’s Investors Service reduced to “negative” its outlook on the city’s debt.

“Until they start selling these units, the risks will remain out there,” Alex Bellefleur, a public-finance analyst at Moody’s in Toronto, said in a phone interview last week.

“There is risk of a downgrade, but we don’t think it would be a multiple-notch cut that would have a significant effect on the city’s credit profile,” Bellefleur said. “The city’s level of shock-absorbing capacity is high.”

‘Bit of a Cloud’

Vancouver’s 4.9 percent bond due in 2019 yielded 100 basis points, or 1 percentage point, more than equivalent-maturity Government of Canada debt at the end of last week. That’s down from 139 basis points on Oct. 19, reflecting reduced perceived risk. Similar-maturity debt of Edmonton, Alberta’s capital city about 750 miles to the northeast, traded about 90 basis points above the federal debt, or 10 basis points tighter than Vancouver’s. In general, debt owners profit as a bond’s yield trades closer to its benchmark.

“Hopefully they do sell those condos in a timely manner and for reasonable value,” said Kevin Dell, who manages about C$1 billion of fixed income assets for Edmonton. He doesn’t own Vancouver bonds. “Investors may have some concerns over the next while until there’s resolution on the Olympic revenues and the sales of the condos. It’s a bit of a cloud over the name.”

Corporate Spreads

British Columbia’s Finance Minister Colin Hansen will propose his 2010 budget tomorrow. The province forecast a budget shortfall of C$2.8 billion in the fiscal year ending March 31, according to documents published in November on the finance ministry’s Web site.

The extra yield investors demand to own Canada company bonds instead of government debt ended last week at 119 basis points, compared with 123 basis points at the end of January, according to the Bank of America Merrill Lynch Canadian Corporate Index.

Canadian corporate bonds returned 2.37 percent in January, the most since May 2003, index data show. The debt returned 0.22 percent in February, including reinvested interest, compared with 0.35 percent in the same period last year, according to the index.

Canada’s economy grew 5 percent in the fourth quarter, the most since 2000, Statistics Canada said today in Ottawa.

Vancouver has advanced C$700 million to Millennium Development by selling debentures, commercial paper and tapping a credit facility arranged by Toronto-Dominion Bank, said Lesli Boldt, a spokeswoman for the Canadian city.

Real Estate Values

Millennium still owes the city C$193 million for land on which the Olympic condos were built, Boldt said in an interview.

While Vancouver real estate values have rebounded from last year’s lows, not everyone thinks the housing units can be cleared quickly.

Cameron MacNeill, president of MAC Marketing Solutions, a Vancouver-based condo marketer, said Vancouver may need to sell the units for an average of C$1,100 a square foot to erase the city’s exposure.

That compares to an average of C$868 a square foot for the first 273 units that were sold before the global economic slowdown began, according the Bob Rennie, whose Rennie Marketing Systems, is leading the effort to selling housing units.

“It’s kind of like having a car lot full of Ferraris,” said MacNeill, who is representing a nearby development that competes with the Olympic Village. “It’s not like the car is bad. No. But there’s a limited market for Ferraris and Lamborghinis.”

That won’t stop Olympic Village boosters from exploiting the condos’ Olympic connection.

“In a perfect world, we’d love to have the athletes’ signatures beside each front door.” Rennie said in an interview. “We’d love to find some sort of ‘Who’s DNA is on your floor?”