MSCI executive director James Harkness. (Steve McLean RENX)

The total return on investment of all assets measured by the MSCI/REALPAC Canada Annual Property Index slipped to 6.68 per cent in 2019 from 7.3 per cent in 2018.

The property index 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.

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 47 portfolios with 2,723 assets totalling 578.3 million square feet and a gross capital value of $184.53 billion.

Data has been collected since 1985 and the total average return since has been nine per cent. It’s been 9.2 per cent over the past 10 years.

Income return and capital growth

The income return for 2019 was 4.6 per cent, which MSCI executive director James Harkness said was the lowest ever. Capital growth was two per cent, which is also slowing.

“We’ve had 10 straight years of capital growth being positive, which is a cycle we haven’t seen before,” Harkness told an audience at the Toronto Region Board of Trade during a Jan. 31 event to reveal the 2019 property index results.

“For an asset class without a lot of volatility, we are going to see continued interest from investors wanting to have allocations in private real estate. The challenge is to find how you allocate in this very competitive environment, with prices across all sectors fairly high.”

The industrial sector had the highest rate of total return at 16.4 per cent, with capital growth accounting for 10.9 per cent of the total with an income return of 4.6 per cent.

“Industrial is driving some terrific returns and we’re certainly experiencing that, not only in Canada but across the globe,” said Teresa Neto, chief financial officer for Toronto-headquartered Granite REIT (GRT-UN-T).

Granite is a pure-play industrial real estate investment trust with a $3.9-billion market cap and $4.5 billion of assets under management in North America and seven European countries.

Neto said the property index results were consistent with what she’s seeing with publicly traded companies in the capital markets.

Residential was the second-strongest sector, with capital growth of 7.3 per cent and an income return of 3.8 per cent. It was followed by office at two per cent and five per cent, respectively.

Retail had a capital loss of 2.4 per cent and an income return of 4.3 per cent.

Halifax is top-performing city

Halifax, surprisingly, was the top-performing city with a total return of 13.3 per cent. That ranking was largely due to a very big year in the residential sector, with a 39.8 per cent return, which offset a negative 15.8 per cent return in its retail sector.

Christina Iacoucci, managing director and portfolio manager for BentallGreenOak — a global investment adviser and real estate services provider that manages about $63 billion in office, industrial, retail and multiresidential assets for about 750 institutional clients — said she was surprised Halifax placed so highly.

She noted it was largely due to large residential transactions and it likely won’t continue to be the leader in the future.

Toronto ranked second with a return of 10.1 per cent. It was followed by Vancouver at 8.4 per cent, Montreal at seven per cent, Ottawa at 6.1 per cent, Edmonton at one per cent, Calgary at 0.3 per cent and Winnipeg at minus-1.4 per cent.

“We’re not surprised to see Calgary, Winnipeg and Edmonton towards the bottom,” said Harkness. “But m,aybe some of you were expecting a bit more out of Montreal.”

While the Toronto and Vancouver markets seem to be peaking, Neto said the Montreal results tell her there’s still “more runway” there before it peaks.

MSCI REALPAC Property Fund Index

The MSCI REALPAC Property Fund Index was created in 2014 and now has these nine open-ended funds contributing to it: 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.

“This was launched in response to investors who didn’t have access to the types of properties that were in the main property index,” said Harkness.

There are approximately 1,000 assets worth approximately $37 billion in these funds, which Harkness said have been good for investors because they “have diversified across cities and sectors and been competitive.”

These property funds combined for a direct property return of 8.34 per cent, higher than that of the property index.

“These funds are valuing their assets a bit more frequently,” said Harkness. “They’re having to be a bit more nimble and they have to figure out how to position value to their investors.”

The industrial sector was again the top performer with a 16.6 per cent return, followed by residential at 10.6 per cent, office at 6.3 per cent and retail at 2.3 per cent.

Toronto was the top city with a 13 per cent return. It was followed by Montreal at 9.6 per cent, Ottawa at 9.2 per cent, Vancouver at 7.3 per cent, Edmonton at 3.3 per cent and Calgary at minus-0.6 per cent.

The rest of Canada had a 5.9 per cent return.