Canada playing above its weight class in global real estate

Canada’s efficient and transparent markets have made the country a global powerhouse of real estate investing, a development that is expected to continue in the years ahead, a panel of industry players predicted at CIBC’s annual Real Estate Conference held in Toronto last week.
“One thing that is very different now then it was prior to the downturn a few years ago is the place that Canadian capital markets are playing outside Canadian borders,” said Jeff Appleby, Executive Director of Canadian Real Estate Investment Banking with CIBC World Markets Inc.
“Previously it was typical to see foreign buyers, with lots of German or Israeli money coming to Canada to buy hard real estate assets. There were also a number of Canadian pension funds spending money on a global basis. This latter trend remains true, while foreign money coming to Canada” has slowed.
The sea change, however, “is Canadian capital markets being tapped to fund acquisitions in U.S. and overseas real estate.”
He noted that a recent Jones Lang LaSalle report showed Canada to be the second-largest global source of cross-border real estate capital, accounting for $14-billion worth of transaction capital. That’s behind the U.S. figure of $36-billion (but impressive for a country one-tenth the size in population terms) “and still outpacing Germany, the U.K. and many other markets that I was surprised to see Canada ahead.”
That power shift to Canada includes American real estate companies looking to file initial public offerings on exchanges north of the border but also the rising incidences of Canadian groups raising capital here at home to spend in the U.S. or overseas.  
Dundee starts a trend
The most obvious example of the “finance it here, buy it there” trend can be seen with the 2011 IPO of Dundee International REIT, created to purchase real estate assets in Germany. Dundee was followed by the Northwest International Healthcare REIT and last week’s IPO of the Inovalis REIT, established to invest in office properties in Europe.
“The Dundee real estate franchise under Michael Cooper has been a proven formula here in Canada, people have made money with Michael and his at time anti-cyclical and opportunistic style,” said Patrick Handreke, the German-born President and Chief Executive Officer of Northam Realty Advisors Ltd of Toronto.
“That paired with the initial distribution of 8%, which is very attractive, along with a long-term tenant that is of credit quality, and the strategy to improve the portfolio as expeditiously as possible, which they have executed on I might add, has been a good fit for Canadian investors.”
Handreke received a number of calls from German real estate contacts following the Dundee entry into that market and told people that Canada’s rise in real estate should be no surprise.
“Canada is an incredibly transparent market, it is probably the most successful REIT market with wonderful analysts and access to capital and that over time has lowered the cost of capital here. That for Germans is something that they weren’t aware of. In Germany the efforts to establish a REIT market have been by and large very modest.
“So it was definitely a surprise to have a Canadian group come in but they have executed,” he concluded. “The next several deals that Dundee did clearly established the fact that Canadian capital is going to be active in not only Germany (but) in Europe for quite a while.”
Companies need foreign presence
With opportunities to buy A class and better office buildings limited here at home, public Canadian real estate companies may think to follow the lead of Brookfield Office Properties and target markets such as London.
Brookfield has succeed in that strategy, and today owns 109 office towers in the U.S., U.K. and Australia in addition to those it holds in Canada.
To do so, however, those companies can’t expect to do it by remote control and need to rather build a foreign presence, said Thomas Farley, the President and Global Chief Operating Officer of Brookfield Office Properties.
“One of the things that we have learned over the years is that you can’t run real estate from the nose of an airplane. It is important to have people on the ground, either as your direct employees or with a partner.”
U.S. recovery showing positive signs
Asked about the prospects for the U.S. economic recovery, Farley said the signs are good. “We believe that there is a recovery in motion and that it is a good time to buy.” Brookfield Office earns nearly 60% of its net operating income from the U.S., where it is concentrated in its core markets of New York, Washington, Houston, Los Angeles and Seattle.
Russell Goin, Cadillac Fairview Corp.’s Executive Vice-President of Investments said there is no lack of capital for high quality core assets in the U.S. over the last two years but the question for the future is whether capital will flow into American B assets in the future.
“I think that you might see more capital flow, people get a little bit more of a risk premium to chase a little more yield in some of the more non-core assets in the U.S.”
When it comes to investing in emerging markets such as Brazil, the Cadillac Fairview executive said that the time from start to actually pulling the trigger on an investment is at least a year.
“We spend time in the country meeting potential partners, politicians, policy makers, there is a lot of upfront work.” The company has the benefit of being backed by owner Ontario Teachers pension fund with their research information network and sources.
“The country is important, and we want to be in a couple of countries, but if we can’t find the right partner, just because the country looks attractive, we won’t do the deal,” said Goin. “Because you are managing from afar and you are putting a lot of trust in your partner.”
New market coming for Cadillac Fairview
Cadillac Fairview, which operates in the core markets of Canada, the U.S., U.K. and Brazil, is poised to enter another in Latin America, said Goin during the panel. “For us emerging markets are key so we are on the cusp of doing something in another country. Hopefully in the next month or so we will close it. We are actively doing it.
The unnamed country sounds similar Brazil, their first emerging market foray.
“It is the same sort of theme, the country we are looking at has a young population, emerging middle class, fairly low consumer debt ratios, rule of law, all of the things that we saw in Brazil a few years ago,” he said. 

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