MSCI executive director Simon Fairchild. (Steve McLean RENX)

The total return on investment of all assets measured by the MSCI/REALPAC Canada Annual Property Index slipped to 4.6 per cent in Q1 2020 from the 7.5 per cent annual rate for 2019.

“As of near the end of March, public markets have clearly taken a very sharp decline, but have come back a bit since then,” said MSCI executive director of client coverage Simon Fairchild during a May 12 online presentation. “We see a trend in returns moving downward.”

The property index measures unlevered total returns of directly held, standing property investments from one valuation to the next. It enables comparisons of real estate relative to other asset classes and comparisons of Canadian real estate performance to other private real estate markets globally.

The property index includes buying, selling, development and redevelopment activity data provided by major pension funds, insurance companies and large real estate owners in Canada. It encompasses 2,369 assets with a gross capital value of $164.71 billion.

Data has been collected since 1985 and the total average return since has been 8.9 per cent. It’s been 9.1 per cent over the past 10 years.

Industrial top-performing asset class

While the industrial, residential, office and retail asset classes combined for a 4.6 per cent total return in the quarter, there was a wide divergence in performance.

Industrial was the top performer with a 15.8 per cent return, though Fairchild said he doesn’t believe that high return rate will be sustainable going forward.

The sector was followed by residential at 10.3 per cent, office at six per cent and retail at -1.8 per cent.

“The weakness of retail is nothing new,” said Fairchild.

He noted the return for super regional shopping centres was -1.6 per cent and the return for mid-range regional malls was -5.1 per cent. Community and neighbourhood malls, often anchored by grocery stores and pharmacies, were in positive territory with a four per cent return.

“There’s certainly a distinction between discretionary and sustenance shopping,” said Fairchild.

Calgary pulls down national average

Halifax was the best-performing Canadian market with a 10.8 per cent return, followed by Toronto at 9.1 per cent, Ottawa at 5.6 per cent, Vancouver at 5.3 per cent, Montreal at 4.7 per cent, Edmonton at -0.6 per cent, Winnipeg at -2.5 per cent and Calgary at -4.3 per cent.

The sharp slowdown in Calgary has pulled the overall national average down.

Fairchild pointed out Calgary’s return was close to 25 per cent and led the nation in 2012, which illustrates the large swings in performance which can occur due to economic conditions.

MSCI/REALPAC Property Fund Index

The MSCI/REALPAC Property Fund Index was created in 2014 and now includes nine open-ended funds: BentallGreenoak Prime Canadian Property Fund; GWL Canadian Real Estate Investment Fund; Fiera Real Estate CORE Fund LP; Fiera Real Estate Small Cap Industrial Fund LP; Greystone Real Estate Fund Inc.; LaSalle Canada Property Fund; London Life Real Estate Fund; Manulife Canadian Property Portfolio; and Manulife Canadian Pooled Real Estate Fund.

There were 1,038 assets under management, worth approximately $38 billion, in the funds at the end of March. The property fund index had a total return of 8.3 per cent during the quarter and the return since its inception is 9.2 per cent.

Every asset in the property fund index is revalued every quarter. The property index has rolling cycles of valuations so only about half of the assets were revalued during Q1. The most recent quarterly valuations took place in March as the economy was undergoing a major downturn due to the pandemic.

Fairchild said the property fund index has more industrial and less retail exposure than the wider index. It also has less representation in Calgary and more in Vancouver, which accounts for its better performance.

REALPAC chief executive officer Michael Brooks asked Fairchild about Vancouver, where performance slipped somewhat during the quarter.

“Vancouver has performed extremely well and prices have become extremely expensive, so maybe there’s been a bit of a correction,” said Fairchild. “Retail was certainly hit hard in the city, so that had a big impact on the overall city numbers.”

MSCI Global Index

The MSCI Global Index was created in 2001. The 2019 edition was released in April.

It includes results from 25 countries and has shown 10 years of positive returns, although they’ve softened somewhat over the past two years and could end that streak in 2020 due to fallout from COVID-19.

Hungary had the best total return in 2019 at around 15 per cent, while the United Kingdom was the worst at just above zero.

There’s also been an increasing gulf between different property types globally. Industrial performed best with a return of around 11 per cent, with office, residential and hotel around six to seven per cent, and retail at less than one per cent.

“Changes in consumer behaviour and increasing amounts of online shopping have been headwinds for the retail sector and have been tailwinds for warehousing and distribution assets in the industrial sector,” said MSCI executive director of real estate solutions research Bryan Reid, who believes the pandemic may accelerate these trends.

Investment allocations have been evolving on the index.

Retail and office, which Reid said had traditionally formed the cornerstones of portfolios, have decreased in importance while residential, industrial, hotel and other asset classes now account for a larger share of the index.

MSCI and REALPAC

MSCI has provided decision support tools and services for the global investment community for more than 45 years. It offers expertise in research, data and technology to power investment decisions and improve transparency across the investment process.

Toronto-headquartered REALPAC is a national industry association dedicated to advancing the long-term vitality of Canada’s real property sector. Members include publicly traded real estate companies, REITs, private companies, pension funds, banks and life insurance companies each with investment real estate assets in excess of $100 million.

The association is further supported by large owner/occupiers and pension fund managers, asset managers, lenders, government real estate agencies, individually selected investment dealers, real estate brokerages, consultants and data providers.