The Entrepreneur: Lessons in Discipline from Canada's Real Estate CEOs

Spring 2013

Could much of the pain experienced in the aftermath of the worst global financial crisis since the Great Depression in the United States have been avoided by following the tenets of Canada’s foremost real estate professionals? William J. Ferguson, author of Market Discipline: The Competitive Advantage, Lessons from Canada’s Real Estate Leaders, says yes.

Canada avoided most, if not all, of the problems experienced by the United States based on fiscal conservatism and strength of leadership, suggested Ferguson, who is chairman and CEO of Ferguson Partners Ltd and co-chairman of FPL Advisory Group.

In discussing the advantageous position of Canada pre- and post-crisis with Canadian real estate executives profiled in his book, Ferguson drew the following conclusions:

The CMBS binge. The most stunning differences between the United States and Canada emerged pre-crisis, according to the author. While the United States went on a commercial mortgage-backed securities (CMBS) securitization binge, creating demand for more leverage, which resulted in too much lending to under-qualified borrowers, Canada followed a far more conservative path. For example, Canada originated fewer loans, securitized less and issued fewer subprime mortgages. In addition, banks in Canada retain on their own balance sheets and service nearly 70 percent of the mortgages they originate, which encourages prudent lending practices.

Tougher mortgage rules. Canada features full recourse loans that oblige the borrower to remain fully responsible for the mortgage even in the case of foreclosure; shorter-term fixed rates with a maximum of five years; widespread use of mortgage insurance, amounting to approximately half of all mortgages (versus about 30 percent in the United States currently and 15 percent pre-crisis); no tax deductibility for mortgage interest, which has not hurt home ownership; and higher prepayment penalties, which discouraged the kind of refinancing that occurred frequently in the U.S. pre-crisis. Taken together, the features and regulations in the Canadian banking sector resulted in a healthier and more sound pro-lender environment in Canada pre-crisis, whereas the U.S. banking system encouraged excessive lending to risky borrowers.

Conservative risk taking. This same conservatism can be found in the mindset of many Canadian real estate leaders, particularly with regard to risk. Canadian real estate firms understand that reasonable leverage is necessary to drive growth, and also appreciate that a viable operating platform and philosophy are fundamental to success. Risk tends to be evaluated realistically with an eye toward identifying what could go wrong, while not putting on the brakes excessively, thus preventing a solid return by taking an appropriate risk.

Risk imbalance. In the United States, unfettered risk kept the “bubble” inflated, which led to a widespread risk imbalance. People were paid to generate volume, not to underwrite risk. Employees were encouraged to compete, not collaborate, and there was more of a focus on individual objectives rather than company performance. Another risky practice was hiring “rock star” performers, instead of putting emphasis on the company and client needs.

Letting ego get in the way. Another leadership mistake made in the U.S. real estate industry, according to the author, was that real estate leaders with big egos pretended to have all the answers, which resulted in know-it-all CEOs who drove organizational opposition underground.

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