We’re starting to see some concerning developments in the luxury real estate market. First, we observed as Urbancorp, one of Toronto’s largest property developers, quietly canceled a condo complex they had been working on, and instead converting the project into rental apartments. This was one of the first signs that demand for luxury real estate is declining.
And then early last week, some more troubling news was reported, when Urbancorp’s attorneys took the highly unusual step of severing their contract with the company. Not only that, but board member James Somerville announced he was quitting, just two weeks after he had been appointed, namely to provide expertise in accounting.
If that wasn’t bad enough, Haaretz reports that Canada’s Tarion Warranty Corporation said they would no longer issue insurance for deposits from buyers of Urbancorp properties. This means that those who put down payments on units being developed by Urbancorp are on their own if the firm stops the project and can’t pay them back. That also means that insurance companies are concerned about the developers’ ability to pay deposits back.
Due to the fact that Urbancorp has yet to release its 2015 financials after its audit committee voted to delay due to “open issues and questions”, we’re eager to find out just what is happening behind the scenes.
Urbancorp bonds traded on the Israeli Stock Exchange plummeted on all of the news, as creditors aren’t trying to stick around for the potential bankruptcy filing.
Speaking of bankruptcy filings, we now learn courtesy of the Wall Street Journal, that the Bauhouse Group has filed bankruptcy for BH Sutton Mezz LLC, their entity that was to build out a 78 floor luxury condominium tower at Sutton Place, located on Manhattan’s Upper East Side.
The Sutton Place tower’s sheer scale—with 78 floors it would reach far higher than surrounding buildings—and location in the middle of a narrow residential street not far from Billionaire’s Row, drew immediate backlash from the community.
The bankruptcy comes on the heels of foreclosure efforts by Gamma Real Estate, who alleges that Bauhouse has defaulted on a loan of roughly $147 million.
These are major developments in the luxury real estate market. As developers rode soaring prices and demand for the past few years, they have now clearly gotten ahead of themselves just as demand has pulled back. They’ve purchased properties they won’t be able to finish, and built developments that have created an overhang of inventory.
As we showed earlier this month, the demand for luxury real estate has shown signs of slowing. Although prices have soared, signed contracts (the underlying driver of the future pricing), has dropped 11% y/y.
First Toronto, now Manhattan. The luxury real estate market is starting to crack, as we now await to see which city the weakness spreads to next.
In the meantime, you can expect to see more debt write off’s by lenders, more bankruptcies by developers, and ultimately, when it’s all said and done, luxury real estate prices falling back down to earth as the market figures out that the bubble has burst, and it is impossible to sell the glut of available units into a market where there are no buyers at current prices.
As the Wall Street Journal summarizes: “this slowdown has made lenders extra cautious when considering high-end condominium projects, making it harder for less-established developers to get financing, said Adi Chugh, founder of Maverick Commercial Properties, an advisory service for lenders. People don’t want to lend on megaprojects and certainly not to sponsors who don’t have strong balance sheets or strong track records.”
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