MSCI executive director Simon Fairchild. (Steve McLean RENX)

Canada’s commercial real estate sector continues to perform strongly both in total returns, and against international markets, according to the MSCI/REALPAC Canada Annual Property Index.

“We’re a major player in the global markets and we punch way above our weight in terms of global investments,” REALPAC chief executive officer Michael Brooks said of Canada’s CRE market.

He was speaking at the Toronto Region Board of Trade during the presentation of the MSCI/REALPAC study, which includes 45 real estate portfolios, 2,424 assets and 522.4 million square feet of space worth almost $161 billion.

The property index, which dates back to 1999, measures unlevered total returns of directly held, standing property investments from one valuation to the next. Its goal is to enhance transparency, enable comparisons of real estate relative to other asset classes and facilitate comparisons of Canadian real estate performance to other private real estate markets globally.

MSCI research results

MSCI executive director Simon Fairchild opened the proceedings by revealing the property index’s data, which was collected from major pension funds, insurance companies and large real estate owners in Canada.

The total return on all assets was 7.9 per cent in 2018. That covers buying, selling, development and redevelopment activity, according to Fairchild, who said “active management activities are boosting returns.”

That total return figure compares favourably with the United States, where it was 7.2 per cent, and the United Kingdom, where it was six per cent.

“We’re in the longest run of uninterrupted capital appreciation that we’ve seen since 1985,” said Fairchild, who called the Canadian commercial real estate market vibrant and healthy.

Index breakdown by sectors and cities

Canadian industrial properties offered the highest return at 13.8 per cent, followed by residential at 11.5, office at 7.8 and retail at 4.4 per cent. Industrial, residential and office showed improvement, while retail continued to weaken from a return of 10.5 per cent three years earlier.

The overall net investment was $6.98 billion, with $1.57 billion going to retail, $1.53 billion to office, $1.49 billion to industrial, $1.3 billion to residential and $875.8 million to other types of properties.

Toronto led the way in overall net investment by census metropolitan area at more than $2.8 billion. It was followed, in order, by Montreal, Calgary, Vancouver, Edmonton, Winnipeg, Halifax and Ottawa/Gatineau.

On an annualized return basis, Toronto was the top performer at 11.1 per cent. It was followed by Vancouver at 10.6 per cent, Ottawa at 7.7 per cent, Montreal at 6.3 per cent, Edmonton at 2.6 per cent, Calgary at 1.4 per cent, Winnipeg at one per cent and Halifax at negative one per cent.

Fairchild said these returns followed a similar pattern as 2017, with Calgary and Edmonton continuing to show a gradual improvement.

Panel discussion observations

Following Fairchild’s presentation, Brooks led a panel discussion involving: Crown Realty Partners investments partner Emily Hanna; GWL Realty Advisors senior vice-president of portfolio management Steve Marino; and Michael Turner, the executive VP and global head of real estate of OMERS, and president of Oxford Properties Group.

Turner said Oxford has $58 billion worth of assets under management and its Canadian properties presented a 13 per cent return in 2018, the highest of any country in which it invests. Oxford’s return in the U.K. was in the single digits, a far cry from not that long ago when London properties would have returns of 25 per cent or more.

“Picking buildings is important, but picking sectors and cities is much more important,” said Turner. “We’re long in the cycle so we’re focusing on quality and markets where we can get liquidity, and we’re trying to build a business that will see us through cycles.”

Marino said the year-end property index results were along the lines of what he expected and similar to its third-quarter numbers. GWL Realty Advisors benefited from its holdings in Toronto’s industrial sector and is also taking advantage of the recovering multi-residential and industrial sectors in Alberta, he noted.

Hanna said Crown has done well by focusing its attention on the Greater Toronto Area and the office sector, citing its closed-end, value-add funds that have been providing investors with a net 19 per cent internal rate of return for 13 years.

While there was a drop in the real estate investment trust index in the fourth quarter, it still had a 6.3 per cent return, which was better than the rest of the Toronto Stock Exchange. While REITs have predictable cash flows and less volatility than many stocks, Hanna said they still face market pressures and the liquidity requirements of investors.

“If public equities start to plummet again, and there’s a corresponding need for liquidity, we may see REITs selling off some assets.”