Property Biz Canada

Another remarkable year for Canadian commercial real estate

In 2012, the Canadian property sector continued to outperform both other asset classes and real estate markets in other countries as measured by the Realpac/IPD Canada Annual Property Index announced this week at a forum in Toronto. The REALpac/IPD index measures total returns for all directly held real estate assets in the four main market sectors of retail, office, industrial and residential held in professionally managed portfolios. Companies providing data for the index, and the Canadian property industry as a whole, use the index to gauge company performance against their peers in Canada, globally and also to calculate executive compensation levels, explained Kevin Adolphe, President and CEO of Manulife Real Estate. A few companies make up half the market While there are not many companies that contribute to the REALpac/IPD Canada Annual Property Index, it nevertheless represents a significant proportion of the professionally managed property in Canada. The index is derived from data provided by only 27 of Canada’s most prominent real estate companies. Minto Properties Group is the most recent addition to the group according to Simon Fairchild, the Managing Director of IPD in North America. Together they own 38 real estate portfolios and about 2,000 individual properties valued at $106 billion dollars, he said. Contributing members to the index represent 45% of the professionally managed real estate on the market and 85% of the pension fund owned properties in Canada, said IPD’s North American leader. In 2012, the annual total return on investment for the Canadian real estate sector was 14.1%, the fifth highest result for the index in its 13 year history. The result is a combination of 7.7% in capital growth over the past year, down from 8.6% in 2011, plus the return on income from the properties. The decline in capital growth is a sign that some of the ‘heat is coming off the market,” according to Fairchild. Calgary, Toronto, Montreal, Vancouver and Ottawa all produced lower returns in 2012 when compared to 2011. Edmonton was the only largest market city that saw an increase in real estate values in 2012. Using IPD’s index as a measure of real estate market performance, the U.S. property market had an annual return of 10.5%, the U.K 2.7%, Ireland 3.5% and 1% in the Netherlands, Fairchild told the forum. Source: IPD Canada (2000-2012) and Frank Russell Canada (1995-1999) The lowest income yield from property since 1985 Income yield for real estate in Canada is at its lowest level since 1985 when data was first collected for this country according to Fairchild. The Canadian market is entering ‘new territory’ with respect to this measure he said. Consistent growth in the capital value of real estate over the past ten years is unique to the Canadian property sector, said Fairchild. It is the only country’s of the 30 countries and 1,000 companies where IPD provides its indexing service that maintains this record. Income growth has played a more important role in most countries he said. The 2012 result is somewhat lower than the 2011 return at 16%, but it is remarkably strong in comparison to other asset classes. Property outperformed public equities at 7.5% based on the MSCI Canada Index, bonds based on the JP Morgan 7-10 Year Government Bond Index at 3.0% and inflation at less than 1%, IPD’s said in a release. The IPD index is not perfect Since the IPD index data is derived primarily from private companies, it doesn’t accurately reflect the ownership breakdown of the Canadian industry, explained Brad Cutsey, an analyst with Dundee Capital. For the first time in Canada, public companies – primarily Real Estate Investment Trusts – have increased their share of the market to about 50% of the real estate sector Cutsey said at the forum. He expects REITs will participate in the index in the future. The IPD index is derived from data provided from real estate companies that for the most part are located in large urban areas and understates the contribution of property in smaller cities, said Cutsey. IPD was purchased by MSCI Inc. in 2012. As a result of the acquisition of IPD, MSCI’s product offering of risk management and investment decision tools for pension funds and institutional investors was broadened to include indepth property-related analysis, said Kurt D. Winkelmann, Managing Director and Head of Risk and Analytical Research at MSCI Inc. While IPD provided the Canadian property index for 13 years, it opened its first Canadian office in Toronto this year. It also has an office in Chicago. Next week at its annual forum held in New York City, IPD is announcing a new Global Property Index that will include Canadian data. It is also working toward introduction of a sustainable property index for Canada, similar to one it currently maintains in the U.K. How will Canada do in 2013? For the second year in a row, REALpac/IPD announced the index details during a forum in Toronto attended by over 200 people. At the RealPAC/IPD event, attendees are asked to provide a ‘best guess’ for Canadian property performance for the year ahead. There was a tie between Michael Mayville with Oxford Properties Group and Damien Moore with Agellan Capital for providing entries last year for the closest estimate for return on investment in 2012. While organizers claim the prize for correctly guessing the return is ‘transient glory,’ last years winner, Brad Cutsey, had the honour this year of serving on an expert panel discussing the results.

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