Starlight Investments, one of Canada’s largest multifamily and multifamily home owners, has suspended monthly payments for two funds.
Starlight, which owns $25 billion worth of real estate and real estate securities in Canada and the United States, has temporarily suspended distributions of two funds focused on U.S. real estate: the U.S. Residential Fund and the U.S. Multifamily (No. 2) Core Plus Fund. stopped. Together, the two funds have $840 million in assets under management and are listed in Toronto following their initial public offering in 2021.
The two funds were established to invest in the recovery of the US real estate sector. While the Canadian market has been frenzied for most of the pandemic, American real estate has been slow to bubble, both in terms of property prices and rising monthly rents.
The Starlight portfolio benefited from this strength, with average rents for larger US Residential Fund properties up 17% year-over-year in the third quarter. However, rising interest rates are now in trouble as both funds rely on short-term floating-rate mortgages to fund their purchases.
“The magnitude and pace of interest rate increases are unprecedented and have resulted in interest rates significantly higher than anticipated at the time the fund funded its assets,” Starlight wrote to investors on Friday. In response, the company has suspended its 4% annual dividend.
Starlight’s Canadian fund is unaffected, but the real estate sector here is not immune to industry woes. In mid-November, Romspen, one of Canada’s largest private mortgage lenders, Suspension of redemption Mainly to prevent retail investors from cashing out their funds. The company did not say how long the freeze will last.
A major problem for Romspen is the inability to quickly or easily sell private loans to fund redemption demands. For Starlight, the problem is borrowing costs. Rising interest rates are also limiting access to loans.
“The massive rise in interest rates has also contributed to higher volatility across capital markets, with major banks and other debt providers reducing their lending capacity while increasing the cost of new loans.” added Starlight.
The company did not respond to a request for comment.
Both Starlight funds were set up to buy US real estate that would benefit from rising rents as tenants were replaced. The fund is designed as a short-term investment vehicle to purchase properties and sell them after three years. The US Residential Fund owns interests in six of his multi-family homes consisting of 1,973 suites and 98 single-family rental homes. The No. 2 US Fund owns interests in three 995-suite properties.
The short-term strategy used to work. Starlight’s US Multi-Family (No. 1) Core Plus Fund, for example, sold its portfolio in September 2021, and investors earned a return of about 28% in his less than two years.
However, the interest rate environment will change dramatically in 2022, with many commercial property owners opting for 10-year fixed-rate homes, while the affected Starlight Fund relies on short-term, variable-rate mortgages. I am using a loan.
Starlight also used variable rate mortgages. This is because it can be repaid with zero interest or minimal costs.
Despite current funding struggles, Starlight believes real estate fundamentals remain strong, with strong employment and population growth in the real estate owning market. The decision was framed as a “prudent approach to managing the fund’s financial position and liquidity.”
But with rent growth and property values starting to fall in many U.S. cities, Starlight isn’t the only Canadian real estate company. Dream Residential REIT also invests in multifamily homes across the United States. Listed in May, when interest rates start to rise. Units slammed on the Toronto Stock Exchange, down 42%.
Shares of Toronto-based Tricon Residential Inc., which also owns US real estate, are down 38% year-to-date.