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High-rises, low returns

A simultaneous fit of euphoria and vertigo weakens your knees as you gaze out the living room window of a brand new 22nd floor luxury penthouse. “This is the chance of a lifetime’’ your real estate broker declares cogently. Your significant other turns to you and grins approvingly; “I love it, honey”. Amidst the flood of emotions and peer pressures, you manage to clear your head and ask yourself one sobering question – is this a good long-term investment? Well, considering that homeowners usually depend on large capital gains to grow their nest-eggs, maybe not. In my educated opinion, this particular type of property, a high-rise, is less likely to produce these desired results. More specifically, a building with fewer storeys may be a better choice if long term appreciation is sought.In order to proceed, certain elements of real estate appraisal must be explained. Fundamentally, there are two components of real estate property: land and the building erected thereon. Imbedded in basic real estate appraisal theory is the humble assumption that while land can either increase or decrease in value over time, buildings will invariably depreciate. Lay people tend to have a difficult time grasping this abstraction, but think of it this way: buildings become dated, they require repairs and renovations, their layout becomes less compatible with modern life, and eventually you may have spent just as much keeping it up to date as it would cost to build a new property. The accretive effect of these deteriorations is expressed as an annual percentage of the original building value – the depreciation rate. These principles of real estate appraisal imply that capital gains on real estate should be primarily the result of increases in land value.My qualm with high-rise condominium projects is that only a small fraction of the sale… Read More

Should China Buy Canada’s Nexen? A Rebuttal

Some months ago, a colleague of mine defended the Nexen deal in an article picked up by the Canadian International Council. Alexander Shalashniy staunchly defended the principles of free trade, painting a national picture of the high-ranking economic freedom that fostered an “open for business” environment in Canada – not shared by the extreme ends of the spectrum in Pierre Trudeau and Brad Wall.  Shalashniy believes that the Investment Canada Act has sufficient protections for Canadian companies in terms of ensuring that environmental regulation, community consultation, and other requirements are being met.What Shalashniy mistakes for “fearful rhetoric” and “government intervention” in the recent backlash over the foreign investment review of the Nexen deal is frankly well-deserved caution stemming from the knowledge that we are living in a world with two classes of investors: market-oriented and state-owned. Government sources reveal that a new definition of the net benefit requirement in the Investment Canada Act will be shortly released that will take into account this new systemic reality in the international trade regime.Free trade is certainly a policy that improves the welfare of developed countries engaged in its practices, but there is a necessary element of reciprocity for its full benefits to be enjoyed. The main concern with state-owned enterprises can be summed up in the question: Are they playing by the same rules? Whether we call it “economic statecraft” or “economic bullying”, China and Chinese SOEs have engaged in economic coercion to achieve political goals at the expense of other nations. The most obvious example is China National Offshore Oil Company (CNOOC)’s recent decision to drill for oil in the disputed territory of the South China Sea to assert sovereignty claims, which have inflamed neighbouring countries, Vietnam and the Philippines.The news cycle revolves overwhelmingly around whether China can invest in Canadian… Read More
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