Canadian investor Toby Chu thinks real estate capital markets are thawing but warns of minefields on the path to more activity

Toby Chu is the Chairman and CEO of CIBT Education Group Inc., one of the largest owners and operators of PBSA in British Columbia, with 1,400 beds across eight operating buildings, serving students from 92 colleges and universities. CIBT owns 31 colleges in Canada. His PBSH serves students from 71 countries. In this wide-ranging year-end interview with The SHURE Initiative, Toby Chu discussed many themes, including the current state of the capital markets and geopolitical turmoil that may further impact international enrollment demographics.

SHURE: 2023 is concluding with continued market uncertainty. As the year concludes, interest rates remain elevated, and additional global conflict exists. Should multifamily and housing executives be concerned as the year ends?

TC: The multifamily sector, depending on which part of the province or which part of the country we're talking about, some areas have their rent control, so that is still facing some headwinds. With rent control in place, inflation, interest rates, etc., the math doesn't add up, so that's just the bottom line. But let's use Vancouver, for example, where I'm located; we saw some good news, especially in the last three months; number one is the federal government; they announced plans for the GST waiver in Q3, so that is a substantial cost reduction. I'm using a round-off number. A project costs 100 million. By taking possession, we have to self-assess 5 percent of that. So that's 5 million right there, which we can now remove from the, uh, from the pro forma. So that's a substantial cost reduction.

The province of BC also proposed plans to open up what we call the TOD, which is transit-oriented development for high density. So, for that developer who owns properties within 200, 400, or 800 meters from a metro transit station, like a subway station, we are looking at a minimum of 24 floors of density as compared to right now, we're looking at 10, so that's a substantial increase. The City of Vancouver has always had this DCL waiver in place, and now they have given us some further definitions and rental developments. We mainly specialize in student housing, which qualifies for it. So, altogether, you're looking at about 10 percent of project costs.

And then, of course, you multiply the future rental income by two to three times more because of a higher density through this TOD, the transit-oriented developments. So this is good news. It helps the bottom line and makes the income statement balance. And then, of course, with CMHC, we have 40 million applications for a project, which took us four and a half months. It could be better, but it does get, you know, to where it's supposed to go. So, you know, it's working, coming together.

That's why you've maybe Q1 and Q2 next year with the bond rate now nose-diving in the last 30 or 60 days; that helps the CMHC loan interest rate. As you mentioned, the sentiment is that the interest rates at least remain stable. People are willing to do deals compared to hibernating, which was the case in the past four quarters.

SHURE: That's an interesting point to reiterate. Interest rates are leveling, and you used the term hibernation. So, we're seeing a potential thawing where the end of the year might have seen more activity. Correct?

TC: From our experience, not speculation, mortgage brokers are working and closing deals, and things are starting to change. The engine starts turning again. It may not be in gear four, but at least it's starting to move as compared to the last four quarters; it was just a slowdown.

SHURE: When did the slowdown start, and you said it ended?

TC: It was March 2022 last year. The interest rate was moving up so fast and furious. It was up 50 percent within 60 days. It's challenging for anyone with a mortgage, especially when you have something coming due, and lenders start writing papers. They just stood still for nearly six months. That's our experience from almost June of last year to December. We had the mortgage renewal and submitted the applications, but no one was writing any papers. They were not rejecting it. So that was the attitude for nearly six months. It costs all kinds of penalties and loans expiring and then getting into extensions and all those costs. Substantially, for us and everybody.  

SHURE: And when did you see that thawing start?

CHU: It started to release by January this year, but lenders are still very cautious. So, for many lenders that are not lending or just lending in a small amount, the land loan is almost like just going to sleep by about the second quarter this year, at about June or July. Then I saw some activities, and most of the activities ramped up between July and now.  

SHURE: Did you observe any interesting or unusual trends internationally in terms of enrollment? You have an education product, and then you have the housing product from your perspective.

TC:  When there are crises, there's got to be some opportunities. Areas with geopolitical sensitivities, such as South Korea, Taiwan, Hong Kong, Vietnam, and South America, actively send students abroad. I heard from colleagues in Toronto that they are seeing more applicants coming in from Middle East countries. So, if you analyze that, you're seeing those are the areas that are facing, you know, geopolitical threats or actually into conflicts. Parents are busy sending their kids abroad.

I was reading on an Immigration Canada website as of June 30th. The total number of overseas study permit issuances was up 77%. Last year was a record year; this year, as of June, it is up 77 percent from last year! So that's quite substantial, mainly because parents are more eager to send their students abroad.

My kid's schoolmate is from Taiwan, and he's been studying in Canada for nearly 14 or 15 years since he was in grade two or three. He received a letter from the Taiwan government: you need to come back to serve in the military after he grew up here in Canada from 24 years old!  

So you can see why parents are concerned about sending their kids abroad.  

SHURE: Let's clarify that point. Are you saying that in these parts of the world bordering potential conflict, more South Korean students are traveling, or fewer South Korean students are traveling?

TC: More! More parents wanted the kids to study abroad in case something terrible happened.

SHURE: And you're seeing that again in what countries?

TC: South Korea, Taiwan, Hong Kong, and Eastern Europe. Because of the European conflicts, we see more international students. So throughout, I think the entire country, Canada, the United States, and all those popular international student destinations are all seeing an increase in their enrollments.

SHURE: It's perceived that sending the students abroad is a perception that it's safer, and potentially, they might get citizenship if they live in another country long enough, correct?

TC: Even before citizenship, studying abroad expenses their knowledge and skill set while waiting for the potential conflicts in their home countries to blow over. That's a good idea. 

SHURE: What predictions did you have one year ago? Looking back to this time last year, the holidays of 2022 predictions you had one year ago that held up. Is there something you thought might happen this year that did happen?  

TC: Well, there are two sides to things: the bad news and the good news. Let me go with the bad news. Since two years ago, I've been saying that this rental inventory will get worse and worse and worse, despite whatever the Canadian government says they are doing or they plan on doing.

I just checked in the city of Vancouver. As of November, two weeks ago, the number of building permits for multiple drawings decreased from 241 development permits to 41 in 11 months! That's an 83% drop right at the epicenter of the housing crisis!

With an 83 percent drop in development or building permit applications, what will come in a year, two, or three years? Nothing! The development pipeline is drying up, and we all know it takes five to six years to build anything from the ground up, rezone, get permits, constructions, five to six years away before we see finished product. So that's the bad news. It will continue to be that way for the next little while, and this is more than just student housing. This is just the overall rental industry. We all know what's coming into the country—new immigrants, international students, etc.

But the good news is, I've been beating this wall drum about having some focus on student housing.

So, for most cities that I am aware of, student housing is not even a page in their rezoning policy book, meaning that if you talk to a city planner about student housing in the city off campus, you need somewhere to look! There's no such thing! The only thing they saw was at UBC or U of T; they built their own on their endowment land.

Recently, I saw a council meeting proposal by the planning department in Vancouver. I propose creating a new section to describe student housing. What's needed? What are the parameters? At least the planners would have something they can put their fingers on; okay, here are the policies. At this point, still, there's no policy. There's no such thing as student housing in their mind, just market rental. So that's good news. I've been hoping and seeing that eventually, it will come, and then it is coming now, and it is now proposed to the city council.  

SHURE:  The other part of the story is that interest rates are starting to come down. So, presumably, if interest rates come down, more people can buy versus rent. How will this play out as interest rates come down next year? Do you foresee a significant drop in rental rates?

TC: No - because of supply and demand. That's always been the fundamental issue. When there's not enough supply and the demand is 10 to 1, even though people are starting to buy, nobody will run out to the market and start buying. If people start doing that, the price per square foot will shoot to the moon.

So it's a circular problem. It's not just one thing that will resolve everything. The interest rate drop will start the engine going, but it won't be going to 100 miles an hour for quite a while because there is an 83 percent drop in building permits. What are they buying? What's there to buy?  

SHURE: From the developer's view, this is a high-risk environment because of the interest rates and the cost of all factors. So they're holding off?

TC: In the last year and a half, who will borrow a couple of 100 Million dollars at a 9 to 10 percent interest rate? Does that make sense?  

SHURE: Good point. When do developers start becoming more eager to build? At what level or what has to change with interest rates? What threshold do we have to reach when you see more applications coming from developers?

TC: Developers have bills to pay, so they have to get the business going. I don't think we can put a pick on what interest rate will make it work, but as long as it's on the right trend, then more deals will get done, more land will be acquired, or people will restart their building permit or development permit process.

The key is that interest rate is slowly decreasing, and banks have started lending instead of just sitting there doing nothing. The engine will begin turning. It might take another year, 2025 before we go into the full ramp-up again, but at least it's moving.  

SHURE: With all of these trends, what surprised you about this past year?  

TC: Well, I guess everybody was expecting a recession in the bigger picture. The common theme is that a recession is also associated with unemployment, but it's reversed now.

We saw inflation, we saw labor shortage, we saw minimum wage has gone to like 18, 19 per hour in BC. So that's a surprise. It was because inflation caused all the construction materials to go up and logistic issues because of the war overseas.

We expected a recession, and we expected the labor rate to come down in 2023, and It didn't! Construction costs continue to go up. Subtrade continued to be expensive. So that's a surprise.

SHURE: We've been hearing about the continued deterioration in enrollment and the financial well-being of the secondary market and regional higher education institutions. It's not happening at the U15 - those are growing in enrollment. Their economic well-being is in a better position if they're increasing enrollments. Are you hearing about a deterioration in the secondary market/smaller market colleges and universities?

TC: This whole thing has a bit of myth, and people must read between the lines. There are two key reasons. Our business is one of the largest private colleges in the country. It was because of the Canada-India relationship that happened during the summer. There's a political issue; the visa office just held everything back. As we all know, India is one of the biggest sourcing countries for Canada's education system, so that has slowed down since July and September. I spoke to one of the owners of a sizable college with 4,000 students, of which about 3,000 are from India. He said it was a scare during the first 30 to 60 days, but by about October, all the visa applications started coming through again - that's good news.

That all boils down to when two governments have a dispute, not picking the students and beating them up. It doesn't make sense! What is it going to do with the students? So that's number one. That's the Canada-India relationship that put a compression on  Indian student inflow. Still, the number again, you know, up to June 30th before this Canada-India relationship, uh, issued went up 77%.

So, we have enough volume in the system to bring us right through. Immigration Canada predicted that this year we will hit 940,000 international student population! Last year, for the entire year, it was 806,000, so still a substantial growth. It was a drop for a short period, but it's coming back.

I also heard the buzz about the federal government elevating admission requirements, which is okay.

I will use an analogy. I have a restaurant with 50 people lining up at the door. Oh, 30 minute wait. It's okay. You know, people will wait 30 minutes. But you will have upset customers when 400 students or 500 people are lined up at your door. Four to five hours to have a meal. So that's what happened to the international education system. So many international student applications are queued up in the system, and we need time to digest them. We are in the student housing business and the school business.

When there are 2,000 beds in the system, it's 1,200 beds. Whether I have 500 waiting at the door or 100 waiting to get in, it doesn't mean any good. It doesn't do me any good. It's the same if you have 1200 beds; you'll earn 1200 beds worth of revenue, so having time to digest what we have instead of letting them continue to build up in the pipeline on a waitlist is good.

We also saw a lot of news in the education sector. Some countries are not particularly wealthy, and they're sending students over by borrowing from families mortgaging their farms. It does cause some problems. Suppose it doesn't work out. It's going to be beyond politics; it's going to be a social crisis. To study abroad, you must have specific financial backing before letting it run free; just anyone can get it. It's going to cause more problems from both sides, both sides of the world.

Pick quality students and ensure they are financially able instead of creating more family issues. You know, overseas.

SHURE: To clarify, are the U 15 and the premier and higher ed institutions in a better position?    

TC: Depending on how many, what percentage of the diversification, if a diversity level is very concentrated with specific after group, that would be a problem. A few years ago, Saudi Arabia shut down their student visa to Canada again because of some political issues. Then, all of a sudden, you had 95% of your student population from Saudi Arabia; you're going to have a problem! But as long as those tier 1 tier 2 cities schools know how to diversify, ensuring that you have students coming in from 180 countries and do not overly focus on one or two ethnic groups only, you should be okay.

SHURE: At the recent SHURE Toronto event, we heard the term 'Indian domination,' that the students from India are now dominating the system. They spend less money, but overall, in terms of numbers, they surpass other countries for international enrollments. So, do you agree with the notion of Indian domination for the next decade in the higher education system?

TC: Currently, it's a reality. But again, India is now the number one or two most significant population internationally. Evidently, by percentage, they could be a more substantial number. However, on the other hand, can every one of those Indian students afford to study abroad or in Canada? That is what I think the federal government is doing, is making sure that whoever comes can afford it, instead of keep going out and then figuring it out by the time you get here whether you'll end up living under the bridge or not even have money to pay for your next meal.

It's true; I know several schools with about 95 percent Indian students. They're bright and intelligent, but will that create a social problem again? I can't bring too many of one particular ethnic group that they couldn't even afford it in the first place. I feel the federal policy of creating some measuring standard ensures we don't make a social welfare problem afterward. It's a reasonable thing to do.  

SHURE: You're a successful businessperson and a great entrepreneur. If a family member or a friend came to you at this time, it's December 2023, and looking to invest 100,000 dollars. How would you advise that person, family, or friends? What would you tell them today?  

TC: Well, at this point, I would tell them to hang tight for now until they see where the market is going. Depending on what type of instrument they're investing in, many minefields are still out there. We've gone through this: interest rates, high inflation, COVID, etc. There are still many minefields.

Real estate investment opportunities could be viable, but the operators themselves may still be struggling through some legacy from the previous three years of continuous beating from the economy and interest rates.

So staying still and waiting till the new year would be a reasonable thing to do.

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