Cap Rate Yield for Multi-Family Residential

Capitalization rates are measurement of real estate "yield", calculated by dividing net operating income by asset price.  Cap rate compression means that the bottom of the ratio (the price of the investment) goes up relative to the top of the ratio (the net income).

Given the low bond yield environment, investors are tuning to REITs to provide yields that outpace inflation - and then some.

Colliers summarizes cap rates for Canadian cities for different real estate classes.  As you would expect. cities with the highest property values show the lowest cap rates .. after all if you pay more for your building but you don't get proportionately higher rents, your yield, or cap rate, is less.  Multi-family cap rates are shown in this table.

Considering lower property values outside major centres, investors could expect higher cap rates.  The Skyline Apartment REIT operates in 42  "B and C" market communities in Ontario.  The Skyline REIT's distribution of 99 cents on a unit value of $13.25 reflects yield of 7.5%, certainly higher than cap rates shown in the table above.

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This tables shows rental rates in Ontario communities (click to enlarge)  Certainly, the cost of a multi-res unit in Guelph, Oshawa, or Kingston is less than one in Toronto - but is it more than enough to offset the 15% lower rent. 

As for property prices, late last year Skyline acquired a 80+ unit apartment in Hamilton for $85,000 per unit.  Compare that to comparable apartments in Toronto such as this one to the right.  It has a cost per unit of $183,000 per unit.

The Skyline Apartment REIT strategy of operating in B and C markets certainly makes sense to investors.