Dundee Securities analyst Brad Cutsey, who correctly forecast last year’s return for the Canadian commercial real estate sector, expects it to maintain a similar double digit pace this year.
The Dundee analyst predicted the market would gain 16%, a forecast he wrote on a business card at last year’s IPD presentation an educated guess that was surely at the high end of predictions made by attendees. It was almost bang on: the total annual total return as measured by the REALpac / IPD Canada Annual Property Index was 15.9% and the third-highest annual return in the 12-year history of the index.
So, with that background out of the way and nearly one-quarter of 2012 in the books, just what is Cutsey’s prediction for 2012? “To me it is going to be a lot more of the same. Last year it was a little more on the back of cap rate compression and this year you have seen a little bit of cap rate compression in the first quarter but it is going to stabilize out so any growth is going to come on the income side,” he said. “So I wouldn’t be surprised if it comes in around 14%” for 2012.
He expects gains to be driven by growth in office and the multi-residential sector (which is in fact not included in the REALpac/IPD Canada index). “What has kept things at bay is really no new supply other than some pockets for office in Toronto and Calgary,” he said. “That said the absorption in those cities has been pretty significant and all the new supply has been absorbed and it has been pretty impressive. So really going forward I think it is a more of a lack of oversupply with steady demand.”
Tight Market Rather than Growth Key Driver
That double-digit growth will occur despite just so-so economic growth overall for Canada, the analyst said. “Relative to the (rest of the) G8 we are looking okay but we are not going to be in a 4% (growth) environment which really would help on the rental side so the way I would put it would be less oversupply with steady demand.”
Real estate is already on pace for a stellar year in terms of merger and acquisition activity with two companies snapped up: Cominar REIT announced in late November that it would make an all-cash offer for Canmarc REIT (and successfully completed the marriage of two Quebec-centered REITs in February) and Dundee REIT swallowed up Whiterock REIT in a friendly transaction.
“As cap rates continue to go down I think some of the publicly listed companies will be forced to look to the publicly listed peers because they are still trading at a little bit of a discount relative to the private transactions,” he said. “You might see one or two more. That’s a lot on the backdrop on two already done, that’s a big year. Four M&A transactions in the REIT world would be one of the biggest years I have seen.”
The biggest “wildcard” for the Dundee analyst is the direction of interest rates, which have room to rise. “Rates can go up and have room to go up, it is just a question of how far and how fast and how expected (any rise is).”
Cutsey’s top picks include two apartment REITs: InterRent “it’s a small Ontario-focused apartment REIT, we think it is trading at really good value” and TransGlobe Apartment REIT. On the commerical side, the Dundee analyst also likes Cominar REIT’s plans for diversification outside of its Quebec base and Allied Property REIT which “has a lot of intensification potential and we don’t think it is fully priced in.” All four are characterized by “great management” as well.
What’s certain this year is Cutsey’s will not win the REALpac attendee straw poll with his 14% forecast. “I wasn’t there” this year, he said.
The 2011 REALpac/IPD Canada Index, announced in mid-February, found gains were fairly evenly distributed among the three major property sectors: office registered the highest increase in total return in 2011 ( up 16.3%) from 2010 (8.5%). Also increasing significantly in 2011 was industrials (12.8%) versus 2010 (8.7%). As well, retail continued its strong performance in 2011 (16.8%) and 2010 (15.6%).
Overall, the six largest commercial property markets generated healthy total returns in 2011. Of the six largest markets, Calgary (21.6%) and Edmonton (13.9%) had the greatest increase in total returns relative to 2010. Vancouver (15.1%), Montreal (15.0%), Toronto (14.9%) and Ottawa (12.8%) also grew in value relative to 2010.