That’s how the year just passed was summed up in the latest REALpac/IPD Canada Quarterly Property Index that found that Canadian commercial real estate continued to deliver double-digit performance for the calendar year with a total return of 10.7%. That was made up of capital growth of 4.9% and income return of 5.5%. (The numbers don’t add up to 10.7 due to compounding).
The Canadian industry was coming off the highs of 2012, when it churned out a 14.1% total return, making it the top developed country recorded by IPD in 2012.
“Looking at the 14-year history of the index, the year ending December 31, 2013 was the ninth highest annual total return,” noted Simon Fairchild, IPD executive director and head of North America. “Returns on direct real estate in Western Canada remained robust, mainly due to above average income and capital returns.”
Of the six biggest markets, the West proved best: Calgary and Edmonton continued to outperform the market overall while returns in Toronto and Montreal were slightly below the market average. Ottawa’s sub-par performance was chalked up to below-market income and capital returns.
Busy, busy ’13
Beyond the top-line numbers, what really struck the IPD data-catchers was just how much was going on in the commercial real estate game last year.
“The first thing that actually came out to us as we were pulling in the data on these 42 portfolios, 2,318 individual assets, was just what an active year it was,” Fairchild said in presenting the findings in Toronto this week.
The REALpac / IPD Canada Annual Property Index, which measures 2,138 institutional-grade properties across Canada valued at $117.6 billion, represents just under half of the country’s CRE market, IPD said.
Investment activity (comprised of buying, selling, development activity and improvements) “soared” to an industry record $19-billion last year. New acquisitions were the second-highest on record at $6.7 billion, offsetting record disposals of $7.85 billion.
“A lot of turnover going on in these portfolios, changing of strategy maybe, changes in direction, refreshing the portfolios,” Fairchild said.
Net investment for 2013 eased to $3.3 billion – “It is still above what we saw in 2009, 2010 and 2011” – while development expenditures continued an upward trajectory to total $2.2 billion.
“These are some strong indications I guess of faith in the real estate sector,” the IPD executive director added.
Despite the solid numbers, IPD determined commercial real estate was not the best investment in 2013. Over the year, real estate’s 10.7% return underperformed public equities at 13.6%, based on the MSCI Canada Index, but did outperform bonds which produced a -3.6% return (based on the J.P. Morgan Government Bond Index 7-10 years) and handily beat inflation, running at 1.2%.
While the 2013 results may not measure up to the year prior, real estate is a champ when looked at from a 10-year performance viewpoint. Over a decade, IPD figures show Canada direct property produced a return of 11.9% compared to 8% for Canada equities and 5.6% for Canada bonds. Inflation, meanwhile ran at 1.7% over that 10-year span.
“It really has been a phenomenal last decade” for Canadian real estate, Fairchild said.
Because Canada is one of the first countries on which IPD generates reports, there are few comparisons at this time, IPD noted. Early comparisons can be drawn with the U.S. and U.K. however.
Canada finds itself in the middle: the U.S. returned 11.6% last year while the U.K. came in at 10.5%, slightly below Canada. Where the stark difference appears is in the annual total return from 2000 to 2013 in which Canada’s real estate returns are almost double those of the U.S. and U.K.
In its report, IPD also tracks real estate back to 1985. That 34-year look uncovered an annualized return of 9.5% “which is pretty good, but the story here is a very cyclical pattern to these returns.”
The performance chart looks like a roller-coaster with up cycles made up of four or five years of growth followed by either a flattening of returns or a correction with negative returns. (The chart shows that Canada is now coming off four consecutive years of higher than average returns, suggesting down times are coming this year or next).
Large malls are stars
The REALpac/IPD Canada study found that super regional malls remain the crown jewel assets in commercial real estate, which is perhaps the primary reason they change hands so infrequently. The big malls had an 14.1% annual return for standing investment assets in 2013. By comparison, residential real estate produced a return of 9.7%, warehousing chalked up 9.1% returns, high-rise office produced 8.5%, office parks generated 8.6% and low-rise came in at 6.3%.
“There is a clear distinction between the property types, or at least between the largest of the regional malls and well the rest of the real estate market really,” Fairchild said, adding all other property types producing single-digit returns.
West is (still) best
The best-performing property markets in 2013 were, not surprising, Calgary (12.9%) and Edmonton (12.8). The Alberta cities’ dominance is slipping, however, IPD found.
“There is still a West-East differentiation here, but it is much less than we have seen before,” explained Fairchild.
Toronto produced a total return of 10.5% (just below the national average of 10.7%). Vancouver produced a return of 11.% for the year, while Montreal and Ottawa were in single digits at 9.2% and 6.8% respectively. Halifax, meanwhile, came in at 11.3%.
“Certainly returns of just under 13% for Calgary and Edmonton are below what we are used to be seeing,” he said. “The locational differences are sort of equalizing as we perhaps come off the back end of the cycle.”