It isn't the prospect of a real estate bubble that should be worrying Canadian real estate executives so much as 'real estates large secular shifts and cyclical patterns' on a global scale, according to Jacques Gordon, Global Strategist for LaSalle Investment Management. Information presented by Gordon, and others at this years Toronto Real Estate Forum indicates that the globalization and securitization of real estate is accelerating and that in spite of good market fundamentals Canada is an under performer on the global real estate stage.
Gordon explained that capital flows in real estate around the world were U.S. $700-billion, 20% higher in 2005 than in 2004. A record $126-billion, 18% of the total, was in cross border transactions with Asian countries the top market for foreign investment. There is so much capital 'that needs to find a home' said Gordon, "that it is queued up two to four years deep." He added, "there are still a lot of 'owner occupied', private family and non-institutional real estate that is going to migrate toward an institutional owner, a market that is 20 times larger than the existing institutional market."
Information presented by Blake Hutcheson, CEO and President of CB Richard Ellis showed that in 2005 the U.S. accounts for 50% of global capitalization in real estate while Canada accounts for 3%, Australia 11%, Japan 8% and Hong Kong 8%. In the past year, Australia was the largest foreign investor in U.S. real estate, with U.S.$10-billion, a country located on the other side of the planet with roughly the same population as Canada.
In Canada in 2005 there is a projected $16-billion in real estate investment. This is an 18% increase over 2004 and 2% below global exansion. Hutcheson pointed out that in an average year this would seem fine, but it pales in comparison to the red hot U.S. market where investment is up 50% over 2004, and in 2004 U.S. investment was up 40% over the previous year.
Foreign investment in Canadian real estate down in 2005
Foreigners accounted for 9% of domestic Canadian real estate investment in 2005 compared to 20% in 2004. Foreign investment has been replaced with investment by institutional investors particularly pension funds. The major transactions in 2005 are:
– Brookfield Consortium (including CPP) purchase of O&Y Properties for $2-billion
– CPP purchase of a $1B stake in Oxford office properties
– Calloway REIT $1.2B acquisition of FirstPro retail properties
and B.C. pension fund purchase of Menkes industrial portfolio for $400-million.
Canadian real estate yields high compared to world
The lower level of foreign investment in Canadian real estate in 2005 is in spite of Canadian city's real estate having the highest yields of all major cities in the world. "Canada with 6% yields in real estate is very attractive by international standards compared to 4% in London, 3% in Hong Kong and 3 1/2% in Japan," said Gordon.
It is not a surprising therefore that research conducted by LaSalle Management Investment shows that Canada is a target market for real estate investment in 2006 along with the Nordic countries. In following years Mexico, central and eastern Europe (Prague, Budapest and Poland) and further east into Russia and the Baltics are predicted to attract foreign investment. In the
3 to 5 year time span Gordon identified Brazil, India, China as target markets.
Experience in other parts of the world suggests a large influx of foreign capital has resulted in significant CAP rate compression. Mark McGoldrick, Co-Head Fixed income Currencies & Commodieties, Goldman Sachs who was involved in the purchase of 700 buildings in Japan in 7 years said, "it is now hard to buy in Japan now where buildings are trading at 3 1/2% yields."
Gordon identified the three most important real estate sector trends to watch over the next five to ten year period as:
Growth in the global REIT/LPT (Listed Property Trust) market
Information presented by Hutcheson showed the global capital market for REITs has gone from $100B in 1990 to $300B in 2000 to $600B in 2005. This growth reflects the current popularity of real estate investment and the ease of investing in a REIT compared to actual properties. More countries establishing REIT legislation, such as recent additions Germany and the U.K., are expected to further stimulate globalization of real estate markets.
Expanded use of financial instruments such as derivatives to boost lower yields
Growth in the securitization of real estate has expanded as the return on global real estate investments has narrowed. Financial vehicles such as hedge funds, selling short and high leverage financial instruments that can boost the lower yields are evidence of this trend. An active derivatives market in the U.K. where Credit Swiss First Boston is taking long and short positions against U.S. real estate are the first of a new wave of real estate derivative.
Redefinition of real estate to include infrastructure
According to Gordon real estate is being redefined to include infrastructure. He said infrastructure increasingly has a real estate component. He said 'it has very steady income streams" and it is "all about the value of the underlying lease". LaSalle Management is pursuing opportunities in air cargo, toll bridges, intermodal ports, toll roads and bridges. Other countries are pursuing the privatization of infrastructure more quickly than Canada notably in Europe.
Gordon identified India as a more promising market for infrastructure growth than China. He indicted that India is ten years behind China in building its infrastructure where he says electrical supply is frequently interrupted, employees have difficulty getting to work and there are no shopping centres.
With the momentum gathered by the existing global expansion of real estate investment we can expect the globalization and securitization of real estate to continue through 2006 and beyond.
Toronto to host an International Real Estate Conference with 4,000 in Attendance in 2006
In response to overwhelming interest in global real estate investment plans are underway for York Communications and its partners to host an International Real Estate Forum in 2006 at the Toronto Convention Centre with 4,000 attendees twice the number who attended this years Toronto Real Estate Forum.