Friday, December 14, 2012

Foreign Ownership of Real Estate


The last ten years can undoubtedly be dubbed Canada’s strongest period with respect to real estate appreciation. Significant demand for all asset classes, particularly residential, has led to unprecedented pricing. While ‘strongest’ might be an uncomfortable word to use for some, I suspect it really depends on which side of the fence you reside – the ownership side, or, the non-ownership side. 

Real estate has now become such a point of discussion; you cannot open a newspaper or entertain guests without real estate values or ownership rearing its head.  A sore point for some…a victory for others.  From a residential perspective, the affordability of Canada’s metro centres has become a challenge for many.  This is no more obvious than in Vancouver where the residential market has become fodder for not only local daily publications, but also publications with a much broader international scope such as the Economist, Huffington Post and the Wall Street Journal. 

Hand in hand with the discussion on real estate values invariably comes the topic of foreign ownership. Although Metro Vancouver has historically attracted a significant amount of foreign investment (US and Asian to name a few), the recent meteoric rise in values has at least been subjectively attributed to offshore investors (particularly within the Richmond and West Side markets).  Unfortunately, while the Land Titles Office (LTO) records the address for a property owner, it does not record whether the owner on title is a resident or non-resident of Canada.  This address can simply be a local lawyers office.  The debate that has waged on has therefore been subjective rather than quantitative. 

Earlier this year, in an effort to understand the issue of affordability, the City of Vancouver created the “Mayor’s Task Force on Housing Affordability”.  The task force determined that the impact on housing affordability by foreign investment was important enough to warrant a separate report on the topic.  The paper cited two separate studies – one conducted by the Urban Futures Institute using LTO data from 2010, and one conducted by Bing Thom Architects using BC Hydro data from 2008.  Without going into details the conclusion was that further investigation was required largely in part due to the limitations of the raw data, and, that no opinion on the effect of foreign investment could be determined.

The point of this preamble is that regardless of what has driven up Vancouver’s prices, foreign investment of real estate is a concern for many nations.  Locally, foreign investment has made the public question whether or not it should be regulated.  It brings up the question as to how real estate should be treated from a sovereign perspective.  Is real estate an asset that should be reserved or prioritized for domestic use? Perhaps the more important question we should be asking is whether housing should remain free from external influences.

Foreign ownership in Vancouver, whatever the level, is simply a representative sample of what is occurring on a worldwide basis.  Most discussions in the mainstream media have tended to focus on the residential side.  Recently however, there has been considerable interest devoted to an asset class that could impact a country’s population in ways that might be more significant than rising housing costs.  The considerable interest in this asset class has attracted the attention of almost every country within 60 degrees of latitude from the equator.  This asset class is agricultural land.

In case you haven’t noticed, (which you probably haven’t but not out of ignorance but by reason of location and income) the world food markets have experienced several price shocks brought about (most recently) by supply side interruptions due to weather related events.  In North America it is estimated that food prices will rise 4-5% next year as corn futures reach record level and wheat hits a 4-year high.  CBC news (Nov 27, 2012) reported that food prices in Alberta are 28% higher than they were in 2002. 

Ok, perhaps you have noticed. But it has likely created less grief in your household than it has in other less fortunate households (or countries for that matter).  Clearly, if the output has risen in price and demand, the inputs have too.  And, considering a rising population, changing weather patterns and higher operating costs (fuel particularly), securing a nation’s food supply has been a top priority for many leaders, not to mention the increased interest by private agricultural REITS, food producers and cooperatives. 

So how does this relate to off shore investment in Vancouver’s residential market?  Like I mentioned, our concerns are a small example of what is happening on a global level.  Agricultural land purchases by foreign companies and state owned corporations have increasingly been in the headlines.  China, Saudi Arabia, the UAE, Qatar, Russia, Japan and Western European nations have all been busy acquiring farmland from other nations that are either more food secure, financially unable to develop their lands, or lack appropriate regulations to prevent the wholesale divestiture of an incredibly important national asset.

Australia is perhaps one of the best examples in the Western world. Recent mass acquisitions of Australian farmland by sovereign funds from China, the UAE, Qatar, Japan and more have the Australian Greens Party wanting a moratorium on agricultural land purchases by foreign interests until the country can understand its position better. New Zealand is seeing a rise in interest from a variety of groups (Save the Farms) to preserve agricultural land for domestic owners.  Interestingly enough, New Zealand, much like BC, is having a very difficult time determining the extent of its current foreign ownership levels. 

In the case of Australia, how much land are we talking about? A lot.  In New South Wales alone, foreign interests control an estimated 800,000 hectares. Think of that in relation to the size of Vancouver Island at approximately 3.13 million hectares.  But again, Australia is not exactly sure what the number is on a national level (estimates indicate between 6% and 11% of agricultural land).  Tracking foreign ownership through the maze of corporations used to acquire land can be challenging.  And consider that Australia’s Foreign Investment Review Board only reviews an investment in land if it is in excess of AU $244 million.  

But should we really care if foreign interests control significant amounts of agriculturally productive land? That’s an argument that partially depends on the country I suspect.  In the case of many African nations that lack the financial wherewithal to develop their lands, perhaps it might be seen as a benefit. At least the host country will benefit from access to employment; a potentially increased food supply; improved technology and industry knowledge; access to capital; and, most importantly, productive agricultural land. 

In the case of Australia however, a country that is already well capitalized and a net exporter of agricultural products, the benefits are not as clear.  And while some might argue that the acquisition by Saudi Arabia (as an example) are being made as purely economic investments much like any fund would acquire an income producing asset (or stock, or bond), I think the issues begin to change when we consider sovereign investment funds as opposed to pure corporate acquisitions.  We also need to be cognizant of how the agricultural industries in countries like Australia and Canada were developed in the first place - through outside influence, foreign investment, and hard working immigrants.  But are the recent massive acquisitions different today?  And have our attitudes and needs changed?

Without respect to subsidies in agricultural production, agriculturally produced goods, for the most part, enter into the supply of global trade.  Regardless of who is producing these assets they should have the same price and the same cost.  As a Canadian consumer, the price of wheat will be the price of wheat regardless of who is producing it. 

Canadian Regulations 

So what about Canada? We certainly do not have a provincial policy in British Columbia to control the purchase of real estate by foreigners.  We do however have the Agricultural Land Reserve that preserves our agricultural land for agricultural use.  At least this controls the supply of agricultural land, but how about the production of agricultural products?

What about other provinces?  It turns out many of our provinces have fairly stringent regulations when it comes to foreign ownership of land - at least when it comes to agricultural land.  Alberta, Saskatchewan, Manitoba, Quebec and Prince Edward Island, all have regulations in place that are intended to prevent foreign ownership of agricultural land (PEI is a little different).

Saskatchewan has historically had the most stringent regulations.  Until 2002, ownership of agricultural land in excess of 320 acres was strictly limited to Saskatchewan residents only.  This law was changed in 2002 to permit all Canadians (and residents) the right to own farmland in the province.  Saskatchewan’s policies appear to be strictly applied.  Recent discussions with Mark Folk, the general manager of the Saskatchewan Farmland Security Board, indicated that their board reviews all purchases of farmland in the province – this is reportedly more than just a cursory review.

It is not surprising to see Saskatchewan has had such a stringent historic policy.  Let us not forget that this is the birthplace of Canadian Medicare and home to Tommy Douglas.  Saskatchewan’s political position might have influenced the creation of the Saskatchewan Farm Security Act in 1974, much like the BC NDP government created our ALR in 1974. 

Alberta and Manitoba also have similar regulations to Saskatchewan that restrict the ownership of agricultural land to predominantly Canadian interests.  In Quebec you need to be a Quebec resident for at least 366 days before one is eligible to purchase farmland. On Prince Edward Island you need to get approval to purchase more than 5 acres (not just farmland) if you are not a provincial resident. 

Obviously the protection of farmland has been of interest to Canadians for several years now.  It would be interesting to sit with policy makers at the time that these Acts came into being to understand the factors that led to their creation and the general climate at the time.  Certainly the recent global surge in farmland acquisition has had significant impacts in other parts of the world with respect to raising the question of foreign ownership.

From a global perspective, Saskatchewan farmland is considered to be very affordable.  Couple this with a stable Canadian government, strong financial system, and many other factors, and it’s easy to understand the interest in our agricultural sector.  Saskatchewan land prices would undoubtedly be much higher today if not for Saskatchewan’s policy. In fact, prices have gone up.  Determining one single factor for their increase is challenging, but at least part of the increase is certainly due to the change in the policy in 2002 allowing any Canadian interest to acquire land.  I imagine we would be looking at a very different picture if there were no restrictions at all.

It is interesting that many of our provinces felt it was important to develop foreign ownership restrictions on agricultural land. I am guessing that the protection and control of our food supply is deemed to be important to the economic welfare, the social fabric, and the safety of many of our communities.  When it comes to residential real estate however, there does not appear to by any such consideration.  Perhaps what we should be considering is that the 'product' produced by residential real estate must be consumed locally. The product produced by agricultural land however can be consumed globally.  On the flip side of this argument however is if foreign investment raises local prices beyond the reach of those tied to the local economy, they are unable to source cheaper housing from abroad much like you would buy apples from Washington state. 

Perhaps we treat residential real estate as an investment to a greater degree than we should - to the benefit of some, and to the detriment of others.  Food, Shelter, and Clothing.  These are motherhood issues.  Perhaps we should ask ourselves what place the government has in the regulation of these basic human needs.  It’s an interesting thought.


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