Capital availability reinvigorates Canadian real estate investment

As the dust begins to settle on a financial crisis that has gripped the Global economy and is now beginning to subside Canadian real estate executives are establishing new corporate strategies.

At the 9th annual RealCapital conference held Wednesday March 3 that had 525 registrants for the entire day and over 1,300 at the CB Richard Ellis Canadian Real Estate Market Update Breakfast, Executives were reflective about what has happened and eager to move ahead.

“In 2008 I didn’t know what to do,” said Michael Cooper, Vice Chairman & CEO, Dundee REIT . Cooper put his company’s plans on hold until the spring of 2009 when he decided the worst of the crisis was over.

Cooper reiterated the sentiment of many others panelists by saying that the Canadian real estate industry is poised with ‘strong balance sheets’ and the benefit of ‘experienced management’ for renewed market activity.

A turn around in the availability of capital is reinvigorating the prospects for Canadian real estate investment. CBRE reported that capital markets in the later part of 2009 raised $3-billion at a significantly reduced cost from a year earlier. The Financial Post recently reported that Canadian REITs are going to issue $500-million in IPO’s in the coming weeks.Financial Post, March, 2010

A testament to the strength of the Canadian real estate industry when compared to the U.S. market is that while there has been a high degree of uncertainty and the flow of deals is reduce real estate transactions did take place in Canada last year.

In 2009 Dundee REIT acquired an interest in five properties for a combined purchase price of $122-million then in early 2010 bought two more office buildings including Adelaide Place. Adelaide Place is a 655,000 square foot office building located at 181 University Avenue and 150 York Street in the financial core of Toronto. It was acquired for approximately $211.5 million and was fully occupied when purchased.

Adelaide Place was profiled in the CBRE market update because of the number of qualified builders, the yield achieved, the level and cost of debt and that only one lender was required for a financing that exceeded $100-million. Michael Cooper said at the conference that the building is expected to have a 10% return on equity and that Dundee thought the tenants would stay in the building.

The acquisition of 151 Front Street by Allied Property REIT was another recent acquisition presented as an example at the conference. A key feature of the building is that it houses high tech equipment that they can be used to strengthen to remainder of the REIT’s 56 building Toronto portfolio.

Due diligence showed that 151 Front St. would be high yielding, its value would grow over time but it was the strengthening of the equity markets that allowed the REIT to acquire the property according to Michael Emory, CEO of Allied Property REIT.

Dori Segal, CEO of First Capital Realty which owns 167 shopping centres across Canada, said that his company has consistently met its goal of investing about $300-million a year in acquisitions and new development. Segal contends that properly managed real estate can sustain the impact of economic downturns and that ‘distressed assets’ regardless of a ‘distressed economy’ are ones where real estate managers have made mistakes.

IGRI Realty CEO, Amy Erixon said that pension funds, particularly those in the U.S., are refining their real estate strategies following their experience of the last few years.

“Unlike the Canadian market where core properties held up well, in the US market capital values of core properties dropped 30%. This experience is causing leading edge pension funds in the U.S. to refine their investment strategies to more closely match upside potential with downside risk” said Erixon. She cited California pension fund CalSTRS as an organization that has reallocated 70% of its portfolio to opportunistic strategies which offer higher return.”

Blake Hutcheson, President & CEO of Oxford Properties Group Inc. formerly Chairman & President of CBRE Canada recently accepted the position at Oxford after a two-year stint from 2008 to 2010 as Head of Global Real Estate Investing for a newly formed multi-strategy private equity firm based in New York.

Hutcheson said that the situation in the U.S. is likely worse that many Canadians realize. He expects it will take 5 to 6 years for the U.S. real estate markets to revive an opinion also held by CBRE who pushed the U.S. recovery to beyond 2015.

CBRE data showed that U.S. office vacancy rates range between 14% and 20% compared to Canadian office vacancy which is in the 8.9% (Eastern Canada) to 11.9% (Western Canada) range.

While Canada has faired better than the U.S. Canadian real estate investment is expected to be modest in 2010 compared to the past. It peaked at $24-billion in 2007 and it will be about $10-billion in 2010 according to Hutcheson.

‘Canada is not on the radar screen’ of global investors Hutcheson said because the market is ‘way to healthy’. He said that Canadian real estate does not reflect ‘international pricing’ attached to the distressed real estate assets available in other countries.

Hutcheson said that for Oxford Properties ‘growth is the operative word’. Oxford Properties is owned by the OMERS pension fund that was reported this week as falling behind in its earnings requirements.

Oxford Properties owns about $1-billion of real estate in Europe and $1-billion in the U.S. The company has opened an office in London, New York and Asia and Hutcheson said they anticipate investing $3 to $5-billion dollars in these markets in the years ahead.

Next year will be the 10th RealCapital conference and in an evolving financial market for real estate there will likely be a whole new set of answers for the same old question of how to pay for a property.

Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

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Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

Read more

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