Robust commodity prices and a strong dollar helped Canada rack up the best performing property market in 2011 out of 24 major western markets surveyed in the IPD Global Annual Property Index released yesterday.
Canada’s return in local currency for last year was 15.9%, compared to the 24-country average of 9.8%. The U.S. property market was the second best performer, clocking a 14.5% gain for the year. What the U.S. market does in any given year has the most bearing as it accounts for 37.7% of the weight of IPD’s global index (compared with only 3.5% for Canada).
Canada enjoyed “a strong bounce back again, commodity driven, had a spectacular year last year pushing values very strongly,” said Peter Hobbs, senior director of Group Business Development at IPD during a webcast to announce the annual index findings. “I suppose raising the question, in Canada after two very strong years, can it continue?”
Canada also stood out, said the IPD executive, because except for a trio of markets that saw no decline in valuations during the downturn, it was the only country over the past two years that has made up the ground it lost from the peak of 2007. Those top performing outliers that did not witness a value decline were Switzerland, South Africa and Korea. The trio “rose through the downturn without any value loss and continued to grow,” he said.
Accounting for currency can play a major role in valuations, IPD noted. Japan, for example, the index’s second-largest market with a weighting of 14.8% produced weaker results for its investors (3.5%) due to the appreciation of the Yen. Over the last four years, the Yen has risen by 60% so investing outside Japan has hurt investors of that country.
U.S. Market is Still the Linchpin
Given the mid-teen returns of the U.S. property market over the past two years, one critical question for investors to determine is whether the U.S. can keep up the momentum. One of IPD’s panelists, TIAA-CREF Managing Director and Global Real Estate Portfolio Manager Chris McGibbon, doubts the States can keep up the pace.
“Our view is that these low to mid-teens that we have seen these last few years are not sustainable and they are not normal….. We think that over several years we will start to converge on the long term average,” and that the 2010 and 2011 bounce was driven by the 30-plus decline of 2008-2009.
Improved market fundamentals could drive the next phase of the U.S. real estate market. “So far it has just been discount rate and cap rate compression correcting the writedowns of `08 and `09,” McGibbon said. “The next piece could be actual net operating income growth as the fundamentals in the commercial sectors begin to improve.”
Not Much Expected for Europe
Anemic growth is likely the best that European commercial real estate can hope for over the remainder of the decade, said Joe Valente, Head of Research and Strategy, with JP Morgan in London. “The best case scenario is for a very long period of protracted, very sluggish, very anemic growth. That is going to be very focused in some of the key markets which we call core Europe, and even in core Europe we can already begin to see some of the differences between a Munich and a Frankfurt and that will continue.”
“We are just going to have to get used to the fact that for the next five, six, seven years you are going to see at best sluggish growth. That’s it. That’s the reality.”
IPD said the range of the best and worst performing markets – about 18% (Canada’s 15.9% and Ireland’s -2.4%) – was similar to 2010 but much more narrow than “inflection years” when markets are rising quickly or falling fast as in 2007.
IPD also breaks down results by property type and for its index. Office property, accounting for about 40% of the global market, was the worst performing sector for the second year in the row. Only in one country, Australia, was office the top sector, outperforming retail, industrial and residential property returns for the year.
The IPD Global Annual Property Index measures the combined performance of real estate markets in 24 countries. The Index is based on the IPD indices for Australia, Austria, Belgium, Canada, Czech Republic, Denmark, France, Germany, Hungary, Ireland, Italy, Japan, Korea, Netherlands, Norway, Poland, Portugal, South Africa, Spain, Sweden, Switzerland, UK, US and the KTI Index for Finland.