CapRE’s Canada Student Housing Forum Preview: Q&A with Greg Romundt, Centurion

TORONTO, ON — Greg Romundt is the Founder and President of Centurion Property Associates Inc., Centurion Asset Management Inc., Centurion Apartment REIT and Centurion Real Estate Opportunities Trust. He has been engaged in investment in residential real estate since 1997 and investments and financial markets since 1991. He has real estate investment experience in Singapore, Britain, Australia, China and Canada. From 1991 to 1997, he worked for Citibank in Toronto, New York and Singapore as a financial derivatives trader in interest rate derivatives, major and emerging currencies and exotic derivatives. From 1997 to 2001, he worked for AIG International Group in Hong Kong, Britain and Singapore as head of emerging market derivatives and then as Senior Vice President and Partner (Emerging Markets). Greg will be a featured speaker at CapRE’s upcoming Canada Student Housing Forum in April, and we connected to acquire a first-hand take on the student housing arena in Canada.

CapRE: Tell us a bit about what you and Centurion do.

Greg Romundt, Founder and President, Centurion Management

Romundt: I’m the President and Founder of Centurion Asset Management. The company has been around for 16 years with 5 business areas – multifamily, student housing, mortgage lending, equity developments, and we have a corporate finance fund that does lending to non-real estate corporates.

CapRE: How was 2018 for Centurion?

Romundt: 2018 was a record year. Our main fund did a 24% return on the year. That was our strongest year for our main fund ever. We had record profits as well. We have very few bad things to say. It was an outstanding year for us.

CapRE: How is 2019 shaping up?

Romundt: We are pretty optimistic on 2019 because a lot of the tailwinds driving the apartment industry continue to remain in place. Although the same tailwinds driving the apartment industry are driving student housing far less. And that will be an interesting topic of discussion at the Student Housing Summit.

CapRE: What other themes or topics do you think will be at the top of everyone’s radar at CapRE’s Canadian Student Housing Summit?

Romundt: I would certainly say that the most interesting things to talk about would be the difference between multi-family & standard apartment income growth — what is happening to rents between those two asset classes. I think people assumed they were largely correlated, but that hasn’t been the case, certainly not in the last two years.

The other thing would be to discuss what kinds of opportunities there are. It seems that the number of purpose-built rental student housing, has not been too large lately. It’s mostly the things in Waterloo and a couple of large deals here and there. But not too much. So one question is how much further consolidation opportunity there is in the space, and over what period of time that will occur.

CapRE: Which markets are you active in?

Romundt: We are active all over Canada on the student housing side. We will look at deals everywhere. We have operations in Ontario, in Québec and we have developments going on in the student housing space in Hamilton, British Columbia and also in Calgary.

CapRE: How do these markets differ? What’s the thought process like for different places?

New SquareRomundt: When you look at purpose-built student housing, the question is where it makes sense to actually build it. Unless you have an on-campus transaction. Because compared to the cost of development (and you’re competing against condos) the question is whether you can create enough rental value to build anything at all. This is one of the big challenges that Toronto has. It’s not 100% unique to Toronto but it’s certainly much more difficult to make the numbers work for Toronto than to make the numbers in Waterloo or Ottawa or any of these other sub-markets, which are suburban, non-condo markets. And again, in Toronto you are definitely competing against condo developers.

CapRE: What kind of trends are driving all of the positive growth you mentioned previously?

Romundt: 2018 was driven in the apartment space by vacancy rates, which were especially low. For a couple of reasons. The student housing and apartment market diverged in 2017 and 2018. Standard multi-family dramatically outperformed student housing. Part of that is, for the population growth we are seeing come into Canada from new immigration, well, there isn’t enough housing being built nationally to accommodate it.

Then, add to that the introduction last year in both British Columbia and Ontario of foreign buyers taxes, and further restrictions by the provincial governments on the rental markets. Now that was subsequently partially reversed in Ontario’s case on new construction apartments. But the damage was already done. Plus the introduction of the B20 rules, which tightened the availability of finance, or at least the ability to finance a home – that all drove demand for rental. And this is all standard multi-family. So rental rates exploded in British Columbia and Ontario. But the same kind of phenomenon is not occurring in student housing because there is not that same relative population move from potential buyers of product to renters.

CapRE: What about more broadly – what if there is a global economic slowdown, or things go south in the U.S.?

Romundt: I do think we are going into a slower period of economic growth, for a whole bunch of reasons. But if the underlying premise is that the U.S. and Canada is slowing, then my thesis is that rental demand is going to increase and maintain pressure on vacancy rates and rental rates. So the same tailwinds we had on the rental markets for both multi-family and student housing will continue in this year, regardless of economic weakness, unless it becomes a very, very severe turn for the worse.

CapRE: How closely do you keep an eye on the U.S. economy? Did the government shut down worry you?

Romundt: The U.S. multi-family market is largely un-correlated to the Canadian market. Primarily because planning restrictions in many parts of Canada, if not most parts, are very tight. So the length of time it takes, from the time you identify a site, to the time to get entitled and construction going, is much longer than anywhere in the United States. Whereas the U.S. has these boom and bust cycles, in Canada, the market can be tight, then super-tight, then just other various degrees of tightness. It just takes so long to build new product that we don’t get those dramatic booms and busts driven by supply.

CapRE: Is there any momentum to speed things up and remove some of these obstacles?

Romundt: There has always been talk about it, but no one has ever been effective at getting it done. The reality is that these are really complex problems and no politicians really understand how to solve them, or do what is required to solve them. There are solutions but they can’t bite the bullet. In Toronto, they just doubled development charges. They raised the cost of building a unit. So property costs will go up. And that makes it much more difficult to even get the permit to build.

The core fight is between those who want housing and those who already live in a neighborhood. And they just completely replaced the governing body that makes decisions on these things – the Ontario Municipal Board – and you now have to go through the courts, which will increase the amount of time it takes to get approval and will also increase the level of risk. So if anything they’re going in the wrong direction.

CapRE: Wow. So what’s the secret ingredient then, to come out on top amidst all of these headwinds?

Romundt: I would say – and I’ve said this for a couple of years – it’s very difficult today to start out without an operating portfolio. Because the industry has become much more sophisticated than when I started in this business, and it’s much more competitive, you need real economies of scale and infrastructure in order to make deals work at the prices you have to pay today. If I had to start this business over today, I’m convinced that I wouldn’t be able to make it happen. I don’t think I could.

CapRE: Good to know. Thanks for your time, Greg. We’ll see you soon!