Developer insolvency rattles Vancouver real estate industry

Homes are in Vancouver, Tuesday, Apr. 16, 2019.JONATHAN HAYWARD/The Canadian Press

The financial difficulties of a Vancouver real estate development company sitting on close to a billion dollars in property has raised questions about the health of the housing market in Canada’s third-largest city.

On Feb. 6, Coromandel Properties filed court papers seeking temporary protection from its creditors, to which it owes more than $700-million. Such filings often lead to the appointment of a receiver for the insolvent company whose assets may be restructured or sold off to satisfy its debts. Two principals associated with the company signed off on most of the debts – Zheng Yu Zhong and Junchao Mo – but the company’s profile was also raised through its employment of five-term Vancouver city councillor and former mayoral candidate Raymond Louie as an executive.

The company’s application is replete with examples of company paying top dollar for sites between 2016 and 2022, borrowing millions to hold on to them, and being unable to redevelop them into more profitable uses.

The insolvency made local headlines, but at least inside the real estate development world it did not come as a shock.

“The market has rumours, we were aware of concerns for a while that had been expressed by not us but other lenders. … It’s a pretty small community,” said John Nicola, CEO of Nicola Wealth, which bought Coromandel out of a joint venture on a Vancouver apartment site earlier this year. Mr. Nicola said Coromandel approached the Nicola Wealth Real Estate arm of the company seeking a “liquidity event” less than a year after the two companies partnered to build two towers of 22 and 14 storeys with 441 market rental apartments and 100 affordable housing units.

In its petition, Coromandel said municipal delays in approving new housing were to blame for its inability to get its projects off the ground. It’s a hot-button issue. The 2022 recent municipal election that turfed out several incumbents including the mayor was largely seen as a referendum kickstarting housing construction. That said, Vancouver is middle of the pack among large cities according to a recent study from the Canadian Home Builders’ Association, which found it had an average 15-month approval timeline.

Those in the industry say everything from labour and construction material shortages to changes in market demand likely also played a role. Coromandel also pointed to the other big shift in the market: interest rates.

“Due to the rise of interest rates since 2022, the petitioners have had difficulty servicing the secured debt on the projects,” the application said.

Coromandel appears to have borrowed more than $700-million to fund its plans for 16 projects in various states of progress. Several lenders have already filed motions demanding repayment of funds, accounting for more than $218-million.

In one example, Coromandel says it purchased a site called Southview Garden in 2017 for $72-million, and there are three loans registered on that property that total more than $80.5-million. The land is a little under three hectares with 140 townhouses and apartments on it that earn about $224,000 in rent monthly. This does not appear to be enough to satisfy the debt payments on loans, as three parties are named seeking repayment: Cenyard Pacific Development Inc. is seeking $21.4-million, WB Partners Canada is seeking $8.2-million and Peakhill Capital Ltd. is seeking repayment of a $50.8-million.

According to Harley Gold, managing director of Peakhill, it’s not actually their loan: “Peakhill Capital is neither a lender nor a creditor on the Southview Gardens building. We have been retained as a loan servicer, and in our capacity as a fiduciary are taking all steps necessary to insure that our mortgagee client is repaid,” he said in a statement, referring The Globe to loan originators Lanyard Capital and Desjardins.

Lanyard Capital is also seeking the return of another $16-million it loaned Coromandel for a site called Alberta 40, which was a land assembly of six properties purchased for $35-million in 2017. The properties generate $15,377 a month in rent, but the interest on Lanyard’s loan is costing Coromandel $4,796 a day, which equates to about 10 times more in costs than the site earns. There’s at least one more Lanyard loan, on a project called AC Nanaimo, which was purchased in 2021 for $29.6-million, with $18.8-million in mortgages, of which Lanyard accounts for $12.76-million it is demanding repayment on.

“Given this matter is before the courts, we have no comment at this time,” said Brian Chelin, principal and director of Lanyard Capital, in response to Globe inquiries.

Another challenge may have been the locations of Coromandel’s sites: “They seemed to have a strategy for land opportunities in Vancouver property; especially the West Side, which is perceived as a prestigious location,” said Jon Bennest, vice-president of product development at real estate analysts Zonda Urban.

Even so, Coromandel’s petition describes one of its most advanced projects – Kingsway Frame – is in East Vancouver and yet it was unable to sell enough preconstruction condominium units to secure construction financing. Finding the right price for this market is proving challenging: “The top end of the market is not performing as well as the middle or upper middle,” Mr. Bennest said.

Mr. Bennest and Mr. Nicola agree that one thing players in Vancouver’s development market need are deep pockets of patient capital.

“If you’re on a development treadmill and running 85 per cent loan to value, you need virtually nothing in terms of something that would go wrong to completely turn that apple cart over and basically you’re buried,” said Mr. Nicola, who described highly leveraged investing as no different than stock frenzies such as GameStop or pouring cash into crypto assets trying to make a market. “It’s not a gamble worth taking, not for us anyway,” he said.

And despite Coromandel’s financial troubles, Mr. Nicola says the combination of demographic growth and the city’s long-term housing shortage still makes Vancouver an attractive place to invest hundreds of millions to build new multi-family housing (Nicola Wealth currently has about 1,500 apartments underway in four locations in Vancouver and Victoria).

“It’s a low risk form of long-term real estate investing, along with industrial it’s much lower volatility than say office or retail,” Mr. Nicola said.