Privately owned commercial real estate in Canada had the third highest annual return on investment in 2011 since the IPD Canada Annual Property Index was first introduced over 10 years ago. This is good news for many Canadian real estate executives whose income bonuses are tied to this industry benchmark.
The Index, which is now the REALpac / IPD Canada Annual Property Index, measures unleveraged total returns to directly held standing property investments from one open market valuation to the next.
The 2011 return at 15.9%, a combination of capital growth of 9.0% and income growth of 6.4% (with a small additional amount allocated to cross-market products of .5%) is the best result since 2005 and 2006. While the capital value of commercial real estate grew by 4% from 2010, income returns fell .5% from 2010 and became the second lowest result on record for that component of the index.
“It was an unexpectedly robust recovery from the global financial crisis” said Simon Fairchild, Managing Director, IPD and is not simply “attributable to plentiful and cheap money”. Improved real estate fundamentals, increase NOI, stable and higher occupancy rates are behind this years’ great performance, Fairchild explained at the annual presentation about the benchmark report for private real estate in Canada.
The data used to compile the report is based on information received from 26 contributing organizations representing private investors primarily pensions funds and pension fund advisors. It includes 2,141 properties held in 42 portfolios with an asset value of $95.2-billion. Half of the value in the index is derived from Canada’s four major urban markets, Vancouver, Calgary, Toronto and Montreal.
Exceptional Returns For Calgary
The national results we’re buoyed significantly by Calgary where there was a 21% return. Fairchild referred to Calgary as a ‘clear outlier’ where capital growth alone at 13.5% exceeded the combined income and capital returns for Ottawa at 12.8 percent. Fairchild described the result as consistent with cities in other resource rich parts of the World which are also experiencing exceptionally positive returns.
The IPD study showed that net investment in the Canadian property market declined to its lowest level in 2011 at $773 million dollars since 2003. Fairchild attributed this to a shift into foreign investment as well as capital moving into the public market, to REITs and REOCs, that aren’t captured by IPD research.
The strength, stability and sophistication of the Canadian real estate led IPD to conclude in this year’s report that there is a strong case for real estate becoming an asset class in Canada, and due to similar characteristics in other countries, globally as well.
IPD is opening an office in Toronto in the near future, a move that will allow the company to better measure the performance and risk management issues related to real estate investment in Canada, explained Fairchild. The company expects to produce in excess of 4 times the information it currently does about Canadian real estate markets.
IPD Rental Information Service (IRIS)
In 2012 IPD is also introducing a Rental Information Service (IRIS) in Canada. IRIS provides a way to measure income and risk by measuring the key characteristics of a portfolio’s contracted rental income stream. It identifies risks to future performance by considering aspects of portfolio income and providing an independent assessment of credit strength relative to industry benchmarks.
Courses To Explain IPD Portfolio Analysis to REITs
REALpac and IPD are offering courses that explain how portfolio analysis can assist Canadian REIT managers. Companies are obliged to join IPD to participate in its data program, an additional expense that so far they have not considered worthwhile said Neil Downey, with RBC Capital Markets. European REITs currently use IPD data and with new services and analysis Canadian REITs are expected to reconsider and possibly join the IPD program.
Global Pooled Property Fund Index
A third initiative that IPD is undertaking is launch of a ‘Global Pooled Property Fund Index’ that Fairchild described as “a truly unique benchmark for private real estate investment vehicles in the world”. Having a Toronto office will ensure that IPD has the data and analysis available to fairly represent Canada within the new index.
With respect to the future of real estate investment in Canada, a study conducted by Prudential Real Estate in the U.S. has predicted that Canadian real estate would grow by 80% in the current decade to 2020, reported Fairchild.
Peter Cuthbert, Head of Canadian Real Estate, Standard Life Investments said that over the long term he is anticipating a return of between 7 to 9 percent and a return to single digit results in the short run. He was one of four experts serving on a panel at the annual results presentation who also anticipate lower returns than in 2011 in the years ahead.