Canada an international star for 2012 RE, IPD finds

Last year turned out to be another good one for international real estate, as real estate securities outpaced stocks generally, with returns of 20% across most major markets and indices.
Direct real estate also posted a relatively solid year, up 7.4% over the year as North America in particular pushed global performance higher, according to the IPD Global and Pan-European Annual Property Indices released this week.
 
Canada was one of the international standouts last year, ringing up a total return of 14.1% in 2012, second only to South Africa, which enjoyed a return of 15.2%. The U.S., which remains the world’s largest real estate market, placed third in IPD’s ranking with an annual return of 10.7%. (See chart).
 
IPD said that real estate’s upward trajectory slowed during 2012, but marked its third year of relatively strong performance across the major global real estate markets since market crash of 2008-2009. 
“Unlike other crises, such as Japan in the early 1990s, investors have not turned their backs on real estate but have instead sought to gain greater access to the asset classes,” said Peter Hobbs, IPD’s Senior Director.
“Real estate remains the favoured alternative asset class, due to its strong relative performance, high income yield, and substantial diversification benefits for multi-asset portfolios.”

 
New players in the global market
The positive performance is being driven by cross-border real estate investing “with experienced global investors in Germany, the U.S. and Canada, being joined by a wave of new investors from Asia, the Middle East and Europe, seeking exposure to real estate across global markets,” said Pierre Cherki, Deutsche Asset and Wealth Management’s Head of Alternatives and Real Assets.
 
Canada, South Africa and the U.S. continued to lead performance over the year, with double digit returns for the year as a whole.  At the other extreme, 15 markets experienced value declines during 2012, all of which, with the exception of Japan, were in Europe.
 
Even among countries, however, there was plenty of variation as cities proved winners or losers over the year in real estate values, IPD found. It found significant variation in Canada as well as the U.K. and determined that most star performer cities were either resource centres, like Calgary or Perth, or  financial or technology capitals such as London and San Francisco.
 
“We have only five countries that outperformed the global index, they are North American, Asia-Pacific and South Africa,” said Hobbs during a webinar presentation of the results. “The U.S. is helping to bring the number up.”
 
Some countries escaped economic downturn
Global capital movement post-2007 can be broken up into three segments, he added.
“We have a few countries who appear not to have had any recession at all, so the likes of South Africa and Switzerland where the returns have just continued to be positive and capital growth has continued to be positive every year. But also in that group (is) Canada, which initially had a bit of a hit, but bounced back and is now at a stronger point than it was in terms of capital values in 2007.”
 
The second group, dubbed the recovering markets, is comprised of three markets, the U.S., Australia and Sweden “who are all bouncing back quite significantly.”
 
The remainder of countries, including most in Europe, are experiencing fallen or still falling real estate values. That second sub-group includes countries such as Hungary and Spain.
Analyzed across real estate sectors within countries, IPD data showed that industrial was a poor performer in 10 of the 26 countries but was the best performing global sector because it was top performer in the U.S.
Residential was the winner in most countries but can comprise a small part of portfolios in most markets.
Residential and office lead Canadian RE
For Canada, sector performance was led by residential and office, followed by retail and industrial, according to IPD data.
 
Broken down to a city level, real estate's total return (the combination of capital growth and income return) showed Canada had a tremendous year in 2012. Calgary posted a total return of 19.2%, Toronto 13.8%, Montreal 12% and Vancouver 11.2%. Overall Canada enjoyed a return of 14.1%.
 
IPD stressed that despite a good year for real estate overall, there was massive variation in returns by region, country, city and property type.
“We are at that sort of transition point, where the economic outlook in an uneven economic recovery at a city level and a sub-level market within cities is driving the fundamentals quite strongly,” said Timothy Bellman, Invesco Real Estate’s Head of Global Research.
“Over the next two to three years the demand is going to come first and fastest in particular locations within cities that are benefiting from the beneficial economic trends: energy, healthcare, technology and so on,” said Bellman. “That is an important part of the focus even for a global investor: to pick the right location, within the right city, within the right country.”
 
Investors Still Hungry
“We are actually seeing investors continuing to increase their allocation to real estate,” said Cherki.
“There are a number of parameters that are really encouraging the investor to do so. Firstly the yields, yield compared to other types of fixed income is extremely attractive. We are seeing that across the board, in some markets more than others.”
“The other thing we are seeing values below replacement cost and that continues to attract a lot of interest,” he added.
Capital is increasing flowing into real estate from new markets such as Asia and the Middle East that are trying to diversify their holdings geographically and more and more from retail investors.
“We have seen in the last few years that retail clients are looking for the same professional service” as institutional investors, said Cherki.
“They want to increase their allocation to real estate for similar reasons and the size of the retail markets both on the high net worth side and the pure retail is very important.”







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