Investment in Canadian real estate dried up in the years following the 2008 but now appears to be flowing again, according to Jane Gavan, chief executive of Dundee International REIT.
“We have seen it picking up recently, I think what is attractive for us is investors are looking to co-invest with us. They are looking for partners on the ground, opportunities and local knowledge and we have access to capital,” she said.
“It was quiet for a few years but over the last six months we have seen a renewed appetite to invest in Canada,” she said. “It is a bit of an education process. In terms of yield expectation, it is tough in Canada. The market is small so we are trying to bring our investors up to speed in terms of what is achievable.”
Chris Tambakis, North America CEO for Adgar Investments & Development Inc. agreed that foreign money is flowing into Canada, and perhaps more than people might realize or official numbers may show. “It is a small market in Canada, size does matter …. a lot of people would tell you that without foreign investors we wouldn’t have the condo market we have today. That is a market that foreign investors can get in very easily, it is very liquid, very simple, through an advisor, through a family member or on their own.”
In more sophisticated investments such as mid-market office buildings or retail or industrial, “you really better be on the ground,” he added. “Because if you are not on the ground, you will potentially lose your money. So that money does seek local partners or local representation.”
Tambakis said he is waiting for a not far-off time when the biggest holders of Canadian real estate like pension funds move beyond exporting their capital out of the country to using their real estate holdings as “currency,” for acquisitions. “I have to believe at some point their real estate here will become part of that currency for trading. Whether it is to enter into new partnerships abroad or to free up capital here and take it abroad.”
Michael Turner of Oxford Properties, who acted as moderator for the foreign investment panel, produced research which showed between $18 billion to $19 billion annually is being invested by Canadian firms in foreign markets led by New York and London. “For those of you who are from the U.S., those numbers might not be staggering, but for those of us who live in the Canadian market, flows approaching $20 billion are quite significant,” he said. “The Canadian market at its peak probably traded $35 billion.”
Panelist Michael Catford, vice-president of real estate investment of HOOPP said the reason that his pension fund has started to invest overseas is relatively simple: “The reason we are doing it is we are finding that we have plenty of money to spend and couldn’t find a home for it because lets face it, there are only six markets worth investing in in this country. And most of the decent product is owned by people like Oxford, Teachers, etc., including us,” he said.
“So it is really the shortage of domestic opportunities that is driving us anyway into the non-domestic frontier.” HOOPP started in the U.K. and Europe followed by the U.S. and has evolved from seeking local expertise to co-investing with non-Canadian partners with some expertise in foreign markets.
Foreign investment carries risks that almost demand higher potential returns, he said. “We have tended to go to the more opportunistic end of the spectrum because you do have tax drag, not so much in Europe (as the U.S.). But you do need to recognize that there is tax drag, there is speed drag, so you need to drive somewhat higher returns in order to justify the exercise.”
Oxford Properties Turner reminded Gavan of Dundee International REIT that a year ago at the same conference her boss, Dundee CEO Michael Cooper said the worst mistake, one he would never make was invest internationally. A year, and a billion-dollar bet on German real estate later, Gavan said that the world is moving fast and real estate investors really should never say never.
“If you read the Wall St. Journal and Financial Times every day, there are 12 different versions of what is happening in Europe,” she said. “You just have to sort of maintain it is a long-term hold, we are a REIT and we believe in the fundamentals for example of this portfolio.”
Canadian real estate investors are also punching above their weight, it seems. “Canada actually has bragging rights and that is very uncomfortable philosophically for Canadians. But you go to Europe and we can actually be very proud of how strong our capital markets are” noting how small in comparison German capital markets are.
The relative disparity was a key factor in Dundee’s successful German investment. “We had this perfect storm of the currency working for us and cap rates working for us so we had an opportunity with this portfolio we acquired this summer to really capitalize on something we never could have done before. So I think that Michael was looking at things from the perspective of look it is too expensive.”