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WINTER 2015 / ISSUE 70
“BECAUSE IT’S 2015” Cross-border capital ﬂows ramp up competition
Investment in U.S. market: Is the boom on or over?
New world cities and the modern economy
How do you grow in an anemic economy
Breathing life into retail through mixed-use development Good sustainability practices lead to higher building value WWW.REALESTATEFORUMS.COM
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Deal Proﬁle: CMHC-insured ﬁnancing for air space parcel Deal snapshot: First National gets ahead of a new financing trend, leveraging its CMHC expertise and network to prove the legal viability of air space parcels and secure CMCHinsured financing.
Client objective: The client was building a mixed-use development in Vancouver, taking advantage of the growing development trend in the city. This particular building included three air space parcels (sections embedded within buildings where ownership is broken up vertically), with one designated for rental apartments. The client wanted to retain this air space parcel and, if possible, secure CMHC-insured ﬁnancing.
The solution approach: The First National team recognized the complexity inherent in the deal and took the time up front to understand the concept and legal implications of this type of ownership structure. At the time, there weren’t other similar deals with a precedent to follow, so the team had to get creative with its approach. The goal was to build a business case for CMHC, which would enable the acceptance of ﬁnancing and present the potential of this growing development trend.
Structuring the solution: At ﬁrst CMHC said no to the deal. But the First National team persisted based on the potential of this deal to be a precedent setter. The team tapped a third party legal expert to validate the air space parcel concept as a real estate entity. It also uncovered examples of other, wellknown developers incorporating air space parcels into
their developments. In researching air space parcels, the team learned that recent municipal legislation encouraged this type of construction, positioning it as a burgeoning trend. Working alongside CMHC, the First National team shared its learning and information, convincing CMHC to issue a certiﬁcate of insurance for this product.
Formula for success: First National levered its relationship with CMHC and chose collaboration rather than aggressive negotiating techniques. The team was creative in its approach and pulled in experts from other industries to help to build a case around the relevance of insuring air space parcels.
The key idea: With such a robust knowledge of CMHC operations, the team chose empowerment over forceful negotiations – arming CMHC contacts with the tools they needed to present a logical argument to the board. The successful combination of teamwork and persistence contributed to the positive outcome for the client, First National and CMHC. To get more proﬁles of successful deals and other ﬁnancing insights from our experts right in your inbox, register for First National’s Commercial Market Update. Type the following into your browser: www.ﬁrstnational.ca/Market-Update/
ﬁrstnational.ca Ontario Mortgage Brokerage License No. 10514
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ON YOUR MARK (MARKET), SET (OBJECTIVES), GO! and private investors will get insider information key to taking advantage of the best opportunities anywhere in the world in the year ahead. George Przybylowski Vice President, Construction & Real Estate, Informa Exhibitions
When you’ve got a direct pipeline to the top property and real estate minds in the industry, it’s no wonder investors are lining up to hear where you think the next portfolio builders will emerge. At this year’s 10th annual Global Property Market (GPM) conference in Toronto, institutions, fund managers, REITs, REOCs
The conference is Canada’s largest such gathering of senior real estate decision-makers focusing on this theme on December 1. Held in conjunction with the 24th annual Real Estate Forum, GPM will examine a myriad of trends in the property market and why there has been an increased movement of Canadian pension funds, lifecos, REITs, and private equity funds into international markets where they are now second only to U.S. entities as top global investors. The Real Estate Forum will then follow and feature leading commentators, presentations and interactive panel discussions with some 90 well-known experts and practitioners from across the country discussing the outlook for the Canadian real estate market for the year ahead.
Together, this two-punch gathering of senior executives will provide investors and industry leaders the wherewithal to make informed choices in the year ahead, capitalizing on the latest international investment information, and a stronger understanding of development, leasing and ﬁnancing trends in the ofﬁce, industrial, retail, and multi-unit residential markets. It is because of these insights that the Forum has been sold-out for ten consecutive years, attracting more than 2,350 attendees. When you combine the numerous networking opportunities together with the high quality of commentators and panelists, the GPM conference and Real Estate Forum is the ideal place to pick the brains of experts in the marketplace — and it only happens once a year. We will be taking this formula and applying it to create a major global real estate conference and exposition in the world’s hottest market – New York City – on June 1 & 2 at the Javits Center. Mark the date in your calendar. You won’t want to miss this very insightful event. ■
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MONTREAL QUEBEC CITY OTTAWA TORONTO EDMONTON CALGARY VANCOUVER PROFESSIONAL DEVELOPMENT, MANAGEMENT AND ASSET MANAGEMENT SERVICES.
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CONTENTS 3 On your Mark (Market), Set (Objectives), Go!
10 Braced for change 12 Canada slows as global markets recover 18 European residential markets 22 Rush of global capital heralds new era 26 Cross-border capital flows ramp up competition 26 Asian investors looking higher up the risk curve 27 New world cities and the modern economy 28 Going short-term globally for bigger profits in 2016 28 Germany is as stable as she goes 30 U.K. investors urged to seek regional opportunities: Eschew the big cities for out-of-the way pockets 30 U.S. market readies itself for investment boom: Economy about to start major upswing 32 Struggling economies abroad a long-term growth opportunity: Long-time global investors increasing their holdings
72 Not your father’s commercial real estate industry: 6 ways the industry has changed 74 Latest issues in sustainability 76 REALpac & IPD: Three industry performance tracking indexes 78 2015 commercial-to-residential tax ratios 80 State of the market 2015 82 Fund management: Time to play catch up About Informa BRINGING KNOWLEDGE TO LIFE Businesses, professionals and academics worldwide turn to Informa for unparalleled knowledge, up-to-the-minute information and highly specialized skills and services. Our ability to deliver high quality knowledge and services through multiple channels, in dynamic and rapidly changing environments, makes our offer unique and extremely valuable to individuals and organizations. www.informacanada.com ©2015 Informa Canada Inc. Disclaimer: The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reﬂect the views, opinions, positions or strategies of Informa Canada. 6
Canadian Real Estate Forum / WINTER 2015
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34 36 It is, once again, a new world 38 The Altus report: Is bigger better? A fresh look at performance indicators 44 2016 outlook: Buyers are ready, product will come 44 Wise retailers on-board with Omnichannel 46 Breathing life into retail through mixed-use development 46 North America, Europe to grow in 2016 48 Choose land over sky: Gazit-Globe investment strategy considers future alternative uses for its properties
50 Key to success based on customer service, not ﬁnance 50 Downtown renaissance 52 Oxford sees ‘steady value’ in Canadian market 52 Discipline and diversiﬁcation deliver during difﬁcult times 53 Good sustainability practices lead to higher building value
Frank Scalisi Director of Sponsorship and Advertising Sales T: 416-512-3815 E: Frank.Scalisi@informa.com See full details on page 64
The Canadian Real Estate Forum Magazine is published three times annually. Editions coincide with key Canadian Real Estate Forum and associated markets:
60 Diversiﬁcation, investing in apartments: Two keys to real estate market success 61 Development momentum cycle 62 E-commerce transforms industrial real estate
56 Wild cards still loom over the Canadian economy
Canadian Real Estate Forum Magazine
For more information on our Conferences visit www.realestateforums.com See our ad on page 65
58 The global view: Investors play it safe
54 Shale oil producers defy shakeout
58 Insights on what lies ahead
Spring: Montréal • Vancouver • Edmonton Fall: Ottawa • Calgary Winter: Canada-wide • Global E-magazines are available at www.realestateforums.com
54 Appointment Notice
Informa Exhibitions, Construction & Real Estate Rick McConnell, President, George Przybylowski, Vice President
Editor & Associate Editor Michel Rémy Jean Pickering
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Not everyone will share your vision, every time. But at Romspen, we look for ways to say ‘yes’. We’re Canada’s leading commercial non-bank mortgage lender with over $1.5 billion under administration. We specialize in bespoke lending solutions for commercial real estate financing in amounts from $4M to $100M. We’ll share your vision, and your entrepreneurial mindset, to provide time-sensitive lending and financing solutions. Let’s talk. Blake Cassidy 800 494 0389 | romspen.com
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Canadian Real Estate Forum / WINTER 2015
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Rita-Rose Gagné Executive Vice President, Growth Markets, Ivanhoé Cambridge
This conference is timely. Sentiment in the market has moved dramatically in the last several months. In early summer, investment markets were strong; then, gradually, a slowdown occurred as investors kept a sharp eye on China and speculated on U.S. interest rates. For these and other reasons we started to ask ourselves: What does it mean for real estate and how long can this very strong cycle go on for? As real estate investors in Canada we are tuned into the oil sector’s current oversupply. The national economy remains in a somewhat stagnant position, though interest rates could remain low for some time. Canada is still seen as a secure investment environment, but with some challenges relating to growth. We’re in a period of uncertainty and introspection. We’re coming up on several years of very strong terms, especially in core markets, many of which have been driven by supportive macro conditions in terms of central bank policy, low interest rates, excess liquidity, and perhaps a structural shift with many institutions increasing their real estate holdings. What’s next? We can probably count on a correction, whether through rising
David Matheson Senior Vice President & Managing Director, Investments – Europe, Oxford Properties Group
interest rates or through a multi-speed economy taking place across the U.S., Europe and Asia. Amid such a compression of cap rates and such an increase in portfolio values in the last six months, is this state of affairs sustainable? Or has the investment market perhaps gotten a little ahead of the fundamentals on the ground? Keep an eye on U.S. interest rates - it should be fascinating in the next little while - and observe their impact on the interest rates in other countries, and on global currencies and capital ﬂows. What will a stronger U.S. dollar mean to emerging markets, and for major European markets? And another point: while recent strength has been driven by demand from the technology sector, what if that changed? Our industry would be particularly exposed if ever there were a market shock or correction within that technology space. Expect to have many of these questions answered, addressed or debated. Enjoy. Glean wisdom from the panelists, and build relationships with your industry peers so that, once back at your desk in the New Year, you will be armed with renewed conﬁdence and new sources of opportunity. ■ Michelle Morra-Carlisle 11
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from domestic pension funds and by the monetary easing that followed the ďŹ nancial crisis. The most striking product of this boom period has been the near-halving of the income yield to real estate investment from 9% in 2004 to the current level just over 5%.
CANADA SLOWS AS GLOBAL MARKETS RECOVER
for direct real estate indicates that returns slowed to an annual rate of 7.3% by the end of 2014, and edged slightly lower to 7.2% by the end of Q3 of this year. Asset values are now falling in Ottawa, Montreal, Halifax and Edmonton (and barely moving in Calgary). It is safe to say that investment returns in Canada are now â€˜below-trendâ€™ when compared to the exceptional performance of the last decade when national returns averaged 11.4% a year and were often in the high-teens. This long bull-run has been driven by a combination of strong demand
While of course real estate investment is cyclical, what is most notable about the current slowdown of performance in Canada is the divergence from the global trend. Chart 1 shows the pattern of returns over the past decade from the REALpac/IPD Canada Quarterly Property Index and reveals the consistent out-performance of Canadian real estate. The chart also shows the recovery in many other markets that now seems to be taking hold, and a Canadian market out of synch with the global trend. This presents great opportunities for Canadian investors to enhance returns by investing in other stronger markets, but also, and more fundamentally, represents the potential to diversify risk by deploying a global strategy to real estate investment. We take a look at both these aspects in turn in Charts 2 and 3.
Chart 1: Annualized Total Returns for Countries with High-Frequency Appraisals All Property Totals in Local Currency â€˘ Source: MSCI
Simon Fairchild Executive Director, MSCI
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While MSCIâ€™s real estate research team does not have a crystal ball that can be used predict future real estate investment returns, the data on 80,000 properties in the IPD Global Annual Property Index provide a very clear mirror to reďŹ‚ect on past returns. In Canada, the Canadian real estate market is nearing the end of its 4th cycle in the last 30 years. The MSCI data 12
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Canadian Real Estate Forum / WINTER 2015
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MSCIâ€™s real estate team has seen strong recovery from the ďŹ nancial crisis in both the UK and US where values fell sharply during the 2008-2010 period. Indeed, total returns in the US have been comfortably double-digit for ďŹ ve years now and returns in London running up to 20% last year. While these strong performances have attracted signiďŹ cant inďŹ‚ows of global capital, many of these target markets now seem fully-priced as evidenced by historically low income yields. Chart 2 plots the ďŹ‚ows of global capital into the US (with data from Real Capital Analytics) against the market cycle of total returns. In the run-up to the ďŹ nancial crisis, we saw a peak of $50bn invested into the US with Canadians and Australian investors representing half the activity. Recent years have seen a similar run-up in investment and returns and although the sources of capital are diverse, Canadian investors still form a signiďŹ cant component of the total. There are many reasons to think of this cycle as different from the pre-crisis boom. The US returns are signiďŹ cantly higher than those yielded in the slowing domestic market and so the idea of buying assets in the US is understandably attractive to Canadian investors. However, record prices may still cause investors to pause, especially as the IPD Global Annual Property Index records an / /
Taiwan, Singapore, Malaysia, Indonesia and Thailand). Across the full range of markets, returns ranged from the boom-level in UK/Ireland through to sluggish in the weaker European markets hit hard during the ďŹ nancial crisis. While our quarterly coverage is not as complete as the national indexes, it clearly shows that strong returns are being maintained in the US (12.8% for the year to Q3) and UK (14.4%) and improving signiďŹ cantly in the Netherlands (7.6%). Data to the middle of the year in Australia, Japan, France and South Africa conďŹ rms this pattern of generally improving performance that contrasts with the slowdown in Canada.
average return over the longer-run of 6.7% a year, indicating that the current returns in the US are well above the norm. While historical data indicates it may be difďŹ cult to attain double-digit returns globally over the longer term (at least on an unlevered basis) Chart 3 shows that there is a wide range of outcomes around the world and hence signiďŹ cant diversiďŹ cation beneďŹ ts to be had from investing outside Canada. MSCI records the performance of over 80,000 individual real estate investments globally, representing around $2trn in asset value, that combine into 25 national indexes and indicators in 6 Asian markets (China,
Chart 2: Flows of Global Capital into the US (with data from Real Capital Analytics) against the Market Cycle of Total Returns Source: MSCI
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Developing your growth strategy involves choosing the right acquisitions to complement your organic growth. ey.com/tas #BetterQuestions
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Alberta has of course been an attractive market for investors in recent years and indeed, is still a favoured location attracting the largest proportion of new capital, second only to Toronto. But as Chart 5 shows, performance can be highly-volatile. Over the past decade, Calgary has ranked top for total returns (in 2006, 2008 and 2012), but close to bottom in 2010 and more recently in 2015. While absolute levels of return may still be attractive over the longer-run, investors clearly need to be mindful of the intervening volatility.
The last few years have been highly proďŹ table for real estate investors in Canada, but as the domestic economy continues to slow and impacts the real estate sector, the beneďŹ ts of investing into the US and beyond seem self-evident. However, as investment horizons broaden and capital ďŹ‚ows out of Canada, it is worth remembering that â€“ like Canada â€“ many of these markets are also showing record low yields. This heightens pricing risk for investors. In this environment, the longer the horizon, the more the beneďŹ ts of diversiďŹ cation come to the fore. â–
Chart 4: All Property Returns as of Q2 2015 1-Year Performance vs 3-Year Annualized â€˘ Source: MSCI â€˘ Note: Chart excludes Dublin.
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And this improvement is evident across cities too, with returns in Amsterdam and Paris running at 10% and well above recent rates. London still retains top spot with annual returns in excess of 20%. Chart 4 shows an interesting divergence with the US too, the San Francisco market very strong indeed and contrasting with sluggish performance in Washington DC in recent years (these 2 markets having clearly different performance drivers that result in different market cycles). Canadian cities have clearly been weaker than most other cities shown here, and falling into the slipping category. Calgary has not been immune from this general trend and is also falls into the â€˜slippingâ€™ category with other cities affected by the weakness in commodity markets like Perth and Houston.
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Chart 5: All Property Total Return Rankings for Selected Global Cities Since Q1 2006 Relative Global Rankings Shift Rapidly with Timing of Regional Cycles â€˘ Source: MSCI
Canadian Real Estate Forum / WINTER 2015
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“With these tax incentives, it’s like we already filled 10 units.” People who know Real Estate & Construction, know BDO.
The Real Estate & Construction Practice at BDO Real estate markets globally are undergoing a period of virtually unprecedented turmoil. Now more than ever, it is crucial to have proactive ﬁnancial guidance to help you address these issues. BDO’s Real Estate & Construction Practice combines in-depth knowledge of the industry with a truly global network of support. All through a single point of contact. Assurance | Accounting | Tax | Advisory www.bdo.ca/real-estate-construction
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EUROPEAN RESIDENTIAL MARKETS Sarah McCay Contributor, Cityscape magazine
EUROPEAN VALUES Winter may be creeping across the continent right now, but for some Europe is hot property. The decline in value of the euro in recent years, coupled with the negative effect of the global recession on many of its property markets, have created a region ripe for investment by non-nationals. For those willing to weigh up the currency and economy risks against the opportunity to purchase property assets at a snip, Europe offers a lot of opportunity. According to Savills’ World Residential Markets 2015 – 2016 report, the ﬁve leading European markets to watch are the UK, France, Spain, Portugal and Italy.
Greek crisis, have all contributed to the euro’s decline. This has made euro denominated property cheaper,” explained Paul Tostevin, Associate Director, World Research, Savills. Markets such as Spain and Portugal are seeing resurgence, with a recent report by PwC also pointing to Spain and Portugal being ripe for investment. Its Emerging Trends in Real Estate – Europe 2015 report cites Madrid and Lisbon in the top ten markets to watch. Meanwhile, newer markets such as the Balkans, Bulgaria and Montenegro are also enjoying growing popularity with overseas investors.
In recent years, the most buoyant international markets have been the UK and Switzerland, in part because of their non-euro currency. However, increasing numbers of buyers are being attracted by cheap prices and stabilising economies.
EUROPE’S HOT SPOTS Spain Spain was seen as the second-home haven for many pre global ﬁnancial crisis. In fact, housing starts peaked at 865,000 in 2006, as developers struggled to keep up with demand. Then the bubble burst and the money pulled out. In 2014 just 34,900 units were started in the country.
“The euro has depreciated against major currencies since 2014, including the US dollar and UK pound. The ECB’s quantitative easing program, anticipated US interest rate rises in the medium term, along with the
According to the Savills World Residential Markets 2015 – 2016 report, the weak euro has made Spanish property especially affordable to GBP and USD buyers, and as a result of the USD peg to most Middle East Canadian Real Estate Forum / WINTER 2015
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currencies, affordable to buyers from these markets also. “The Middle East is a rapidly growing source market for residential investment in the country – particularly at lower price points,” the report stated. This demand has been fuelled in part by the rapid expansion of air routes to and from the Middle East with airport operator Aena reporting summer capacity up 36.6% for 2015 over 2014. Spain is also an attractive investment option for Middle East investors because of its Golden Visa scheme. A EUR 500,000 investment in real estate provides non-nationals with a residency and working rights in the country. This incentive attracted 530 foreign nationals to invest in Spain between September 2013 and December 2014, according to the Savills report. “Marbella has seen growing activity among Middle Eastern purchasers, and at lower price points than they have historically brought. Prices here are on the recovery and property in well-located areas, in close proximity to the coast and airports, offer the best rental potential,” explained Tostevin. Portugal Portugal is another European property market that has beneﬁted from the Golden Visa scheme. The same as Spain, non-nationals need to invest a minimum of EUR 500,000 in real estate to be granted a visa and longer term - a route to an EU passport. Foreigners need only be resident in Portugal for seven days in the ﬁrst year of residency, making this an ideal holiday home purchase. According to Savills, the Golden Visa scheme has brought EUR 1.46 billion in investment to Portugal since its launch in 2012, with more than 1,500 visas issued in 2014 alone.
“Investors in Portugal through the Golden Visa scheme have concentrated on Lisbon – there have been relatively few in resort locations – and at prices close to the EUR 500,000 investment minimum,” Tostevin stated. Today, Portugal’s economy is making tentative progress once again, with GDP up nearly 1% in 2014. The country did not fall victim to the same levels of over-development seen in Spain, and as such its property market has seen relative stability in recent years. New rental laws have moved towards making buy-to-let property a more appealing proposition. Add to this the fact that there are no restrictions on foreign property ownership and transaction costs are low, and it’s easy to see why this is one destination to watch. United Kingdom According to the Savills report, the UK remains one of the most stable and proﬁtable places to invest in Europe, with London still leading the pack - mainstream prices in the capital rose 14.9% in 2014. The Economist House Price Index, released in October 2015, shows growth and future promise from the UK. According to The Economist, house prices in the UK have risen 11.5% from Q2 2009 to Q4 2014. In tandem with this, the new-found conﬁdence in the market has seen construction pick up, with the latest Markit/CIPS UK construction PMI reporting 28 months in a row of growth and job creation. While London is often the magnet for overseas investors, agents are urging clients to consider other locations in the UK. “For years, many international investors have focused their efforts on London but in light of spiralling property prices in the capital, we are ﬁnding that some of the best opportunities can be found further aﬁeld. “The buy to let market in the north of England, particularly in key hubs such as Manchester, Liverpool and Nottingham, is proving to be very rewarding, delivering strong rental returns combined with steady capital growth,” said Graham Davidson, Managing Director of Sequre Property Investment. According to Davidson, Manchester currently offers strong average gross yields of 7.5%, compared to 4.5% in London, while
a typical two-bedroom investment property costs in the region of GBP 90,000 versus GBP 400,000 in the capital. Germany According to The Economist House Price Index report, home values in Germany were largely immune to the global ﬁnancial crisis that started in 2006/07, with prices rising 22.8% between Q1 2009 and Q4 2014. PwC lists Berlin as its number one city to watch in its Emerging Trends in Real Estate – Europe 2015 report. According to the professional services ﬁrm, EUR 2.9 billion of deals were transacted in the ﬁrst three quarters of 2014. Meanwhile, Hamburg comes fourth on the PwC list. The city saw a 38% increase in property deals in the ﬁrst three quarters of 2014, achieving EUR 2.4 billion. A big part of Hamburg’s increasing popularity is down to its 157-hectare HafenCity inner-city development project. EMERGING MARKETS TO WATCH Spain, Portugal, the UK and Germany may well present safe bets for the foreseeable, but more adventurous investors should also consider central and Eastern Europe for property purchases. Savills’ Tostevin points to the ski resorts of the Balkans as one area attracting attention, and not just from western tour operators. “Kopaonik in Serbia has a reputation for ski in- ski-out properties, and attracts domestic, British and Russian skiers. A candidate for EU membership, foreigners may purchase freely in Serbia under a reciprocal agreement. In Bulgaria, Bansko offers access to Pirin National Park, a UNESCO world heritage site, while Borovets has been established as a winter resort since 1896,” he explained. Tostevin also recommends Montenegro, which is emerging as a popular second home destination. “Historically dominated by Russian and Eastern European buyers, the market has been sluggish in recent years, but a favourable exchange rate has triggered more British buyers, focused on the Kotor Bay area. Still an emerging destination for leisure property, it ﬁts with our long-term view on the growing appeal for the authentic,” he said. ■
Canadian Real Estate Forum / WINTER 2015
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RUSH OF GLOBAL CAPITAL HERALDS NEW ERA
Catherine Ann Marshall
The rush of headlines heralds a new era in global real estate investing: Today’s news item is the Norwegian Sovereign Wealth Fund’s plan to invest another $4 billion globally. Yesterday, it was a Chinese insurance executive urging his compatriots to buy abroad. Before that, it was Blackstone raising a record $15.8 billion global fund. Global Investment Triples Ross Moore, Director of CBRE Canada Research, says the volume of cross-border acquisitions around the globe has tripled since 2010 as investors try to meet their return objectives. This rush of capital searching for opportunities reﬂects investors’ belief in the old adage "there's always a bull market somewhere." Rosemary Feenan, JLL’s Director of Global Research, has a similar perspective. “There are opportunities emerging everywhere,” she said. “We are in a new era of competition between cities.” Beyond the traditional “gateway cities” are many other cities that are emerging globally and attracting growing capital ﬂows. Feenan calls these up-and-coming destinations – such as Munich, Melbourne and Miami – the “New World Cities,” and says they are attracting a disproportionate share of global ﬂows relative to their size as investors look for better value. In fact, real estate acquisitions in New World Cities now represents nearly 19% of global ﬂows, she said.
This doesn’t mean that up-and-coming investment destinations will unseat the top Gateway cities of New York, London, Paris, Tokyo, Hong Kong and Singapore anytime soon. According to JLL, these six cities alone account for 22% of global investment. Targeting investment in the next “bull market” is part of the strategy behind the CBRE Global Investment Partners’ Global Alpha Fund, says Portfolio Manager Ivo de Wit. He says that investing nimbly and using CBRE’s world-wide market intelligence to select winning locations, sectors and assets is a sustainable strategy to produce “alpha” (outperformance). Having an international scope allows de Wit to buy in cities or countries where he forecasts increasing returns, and sell in markets he thinks are approaching their peak. When asked about the effects of global capital ﬂows since his fund’s inception in 2010, de Wit gives a wry laugh. “I need to keep capital ﬂows in mind all the time now,” he said, adding that pricing is getting ahead of fundamentals in some of the most popular markets, and in locations where investors anticipate an ongoing recovery. For instance, de Wit’s Fund sold its Tokyo ofﬁce investment last year just as rental growth increased and a wave of capital started ﬂowing in. Recently, he bought an ofﬁce tower in Paris, a market that is currently out of favour with international investors. “I am constantly working to stay ahead of the real estate cycles, he said. Canadian Real Estate Forum / WINTER 2015
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Cross-border Capital Flows in H1 2015 Source: © Invesco Real Estate using data from Real Capital Analytics as of September 2015
The benefit of global Core investing is “a smoother ride over time” with less return volatility, said Luke. She explained that since 2010 the IPD Global Property Fund Index produced an average 11.5% return but that different regions over or under performed within that five year period.
Canada Weakens, Global Inflows Plunge “Plans that limit themselves to the Canadian real estate market are missing out on a world of opportunity,” says Tracey Luke, Portfolio Manager of the new Invesco Global Direct Real Estate Strategy. “Not only is the Canadian market limited in size, but returns have fallen considerably,” Ms. Luke added. Invesco’s analysis of Real Capital Analytics’ data on cross-border capital ﬂows shows that in the ﬁrst half of 2015, Canada was an outlier among major markets as it saw negligible foreign inﬂows into its real estate market. Pair this with strong outﬂows of Canadian capital to the U.S. and the U.K./Europe, and a picture emerges of Canadian investors strongly responding to the rationale to “go global”. Hans Nordby, Managing Director, CoStar Portfolio Strategy, says his research on currencies shows cross-border investing can be particularly attractive to Canadians. Nordby, an authority on the impact of currencies in cross-border real estate investing, explained that because the Canadian dollar (CAD) is tied to commodity cycles, the “loonie” is strong when commodities are booming. Periods when the CAD is appreciating are also when the economy and real estate returns are generally strong. However, as commodities fall and the CAD weakens, returns on non-Canadian real estate translated into CAD increase.
Nordby’s simulations on Canadian portfolios showed that over a 15-year period, what would have been a 10.2% return on a portfolio of international ofﬁce investments turns into a 10.5% return when translated into Canadian currency. This “anti-cyclical” aspect may mean that Canadian investors can beneﬁt more from foreign investing than investors whose native currencies are less inﬂuenced by commodities prices. Large investors have been leading the charge on global investing for at least a decade. However, Invesco’s Luke says smaller Canadian investors are also increasingly interested in global real estate, which led to Invesco offering its Global fund to Canadian investors in October 2015. The beneﬁt of global Core investing is “a smoother ride over time” with less return volatility, said Luke. She explained that since 2010 the IPD Global Property Fund Index produced an average 11.5% return but that different regions over or under performed within that ﬁve year period. Luke commented “because different regions and markets within those regions can be on an up or down cycle at the same time, a winning strategy enables the ability to take a view and then tactically lean in or out of regions and markets to add outperformance.” Catherine Ann Marshall, CFA, is an independent Global Investment Consultant
Canadian Real Estate Forum / WINTER 2015
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CROSS-BORDER CAPITAL FLOWS RAMP UP COMPETITION speciﬁc marketplaces, as opposed to countries,” he explained. Others who are willing to look further aﬁeld for the prospect of higher returns need to consider the potential pitfall, Paine cautioned. David Paine Head of Real Estate, Standard Life Investments
Big sovereign wealth funds, large pension plans and high-worth individuals have turned to real estate as an alternative to equity markets, ratcheting up unprecedented demand for quality assets. “It’s a very competitive environment,” declared Standard Life Investments Head of Real Estate David Paine. “Particularly in Europe, the range and volume of people looking to deploy capital across the entire spectrum is as wide and as deep as I’ve seen.” That leaves many investors stymied, unable to get their money working for them. Some simply pay premium prices to get the exposure that they want in core markets. “They often look at the world as dominated by global cities and
“You have to understand the risk associated with that return,” he said. “While there might be outsized returns in the ofﬁng in some emerging markets by just a tactical timing play, clearly there are greater risks. The volume of capital available makes if quite hard to place in some markets.”
Underperformers Ireland and Spain have bounced back boldly from recent setbacks, but will need to bolster their fundamentals to sustain those advances. “France, Netherlands and Europe-wide logistics have performed extremely well and will continue to perform,” Paine forecast. At the other end of the scale, Finland will suffer due to its proximity and close trade ties with Russia and, in Poland, the Warsaw market faces lack of demand pressure. In London, yield compression and tapering rent growth is pushing investors to look further aﬁeld, mainly in southeast England. Government economic stimulus in Japan, should boost rental growth in Tokyo, he added.
“You have to understand the risk associated with that return.”
“We view that market positively,” Paine said.
Liquidity is another factor, when it comes realizing those returns.
“Some markets like the Melbourne and Sydney industrial sector will do very well, while commodity-driven markets like Perth will take a hit,” he said. “In Canada, Calgary and Edmonton face real challenges while higher industrial income will attract capital to Toronto and Montreal.”
“It’s all very well getting your money in to get a return, but can you get it out?” Paine asked. He urged investors to weigh markets for their transparency, legal framework and the depth of their liquidity pool to calculate their true risk-adjusted return. North American returns will likely cool down to single-digit growth, he expects, as will those in the United Kingdom, while continental Europe, revs up. Paine predicted double-digits returns there on average, but counseled prudence. “You have to understand the bets that you’re taking and factor in the liquidity in those markets as well as the time-horizon of your investment,” he explained.
The mixed economies of Australia and Canada, on the other hand, are a mixed bag.
Political factors like Ukraine and the Middle East remain a wild card, Payne noted, as does macroeconomic policy. “Eurozone issues have not gone away,” he concluded, “and we’re unpicking quantitative easing and injections of liquidity that we haven’t witnessed before. Is there the prospect of a policy misstep? There is.” ■ Robert Frank
ASIAN INVESTORS LOOKING HIGHER UP THE RISK CURVE Inbound and outbound capital ﬂows in the Asia-Paciﬁc region are both “signiﬁcantly increasing,” says William Shaw, the Head of Direct Property, Asia-Paciﬁc, for Aberdeen Asset Management.
William Shaw Head of Direct Property, Asia-Pacific, Aberdeen Asset Management
Exactly how much is difﬁcult to tell, he says. “There’ve been several estimates from different ﬁrms, consultants, agencies and research ﬁrms. What I’ve found is that none of the data is consistent.” Shaw says outbound capital ﬂow is being driven “largely” by one key factor. “There’s a smaller investment universe of institutional
quality real estate within Asia for Asian investors. So that makes it more attractive for them to seek overseas capital.” They’re looking for the stability in the overseas institutional real estate market, Shaw says. There’s a “signiﬁcant majority” of Asian investors focused on the U.K. and the ofﬁce/commercial market, he notes. Asian investors have “a strong desire” to invest in the U.S. and North America -particularly in gateway cities such as New York. But there aren’t a lot of high-yielding North American investment properties Canadian Real Estate Forum / WINTER 2015
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NEW WORLD CITIES AND THE MODERN ECONOMY
Director of Global Research Programs at JLL, is a greater chance at success in diverse, niche and contested markets. Since the global ﬁnancial crisis, there is no longer a clear correlation between a city’s economic size and its growth capacity, says Feenan, who led the comparison of the performance of 660 cities worldwide in a recent report. Each year, the global urban population grows by 50 million, while at least two or three new cities cross the US$100 billion GDP threshold. “Accrued size, power and wealth are no longer guarantees of success,” says Feenan, who notes that large established cities such as Tokyo, New York and Paris rank in the bottom third in terms of growth, while emerging megacities are growing rapidly.
Rosemary Feenan Director of Global Research Programs, JLL Thanks to globalization in today’s urban age, we’re starting to see the dissolution of rigid pecking orders and the competitive hierarchy they’re based on.
“We’ve discovered three new clusters of cities that we are excited about, as they will help us understand all the big changes happening in the market and the new drivers of success out there.”
What this means for modern cities, says Rosemary Feenan,
One key cluster is called the Big Six, accounting for 22 per cent of global real
The New World Order of Cities
Established World Cities New York London Paris
“There’s a perception that second tier cities are chosen when it’s too expensive or difficult to get into the gateway cities. We think it’s not just about that anymore – there’s a clear desire to compete alongside the big boys but in a slightly different way.” estate investment and comprised of inﬂuential supercities such as New York, Paris and London, along with Singapore and Hong Kong. Emerging world cities is another cluster, comprised of business and political capitals of large or medium-sized emerging economies that function as gateways for international ﬁrms, trade and investment such as Beijing and Shanghai. But perhaps the most intriguing cluster is the 35 New World cities they identiﬁed-small or medium-sized cities that deliberately specialize in number of global markets. They include cities such as Copenhagen, Oslo, Seattle and Frankfurt.
Source: The Business of Cities, JLL, 2015
Emerging World Cities
Tokyo Hong Kong Singapore
New World Cities Vancouver Munich Denver Oslo Barcelona Brisbane
Agile Higher-Quality Emerging
High Potential / Weakly Governed
Istanbul Kuala Lumpur Taipei Mexico City
Dubai Santiago Bangalore Shenzhen
Mumbai Manila Jakarta
Dhaka Lagos Karachi
We think it’s signiﬁcant that as a group, these 35 new world cities are attracting an increasing investment share,” says Feenan. “As a proportion of global real estate investment, the share has increased from 11 per cent in 2006 to 18.5 per cent last year. “There’s a perception that second tier cities are chosen when it’s too expensive or difﬁcult to get into the gateway cities. We think it’s not just about that anymore – there’s a clear desire to compete alongside the big boys but in a slightly different way. ■ Barbara Balfour
“There’s a smaller investment universe of institutional quality real estate within Asia for Asian investors. So that makes it more attractive for them to seek overseas capital.” available to foreign investors. So Asian investors turning to the U.K. for this “low-hanging fruit,” says Shaw. “The Chinese and Koreans have been the most active. We’re starting to see another wave of mid-tier investors go abroad,” he says. A lot of this mid-tier is Asian life insurance companies, he notes. “What they’re looking for are www.realestateforums.com
long-term, stable income-yielding assets to meet their obligations as insurance companies.” Asian investors are willing to pay premium prices for overseas properties because “relative to them in their own universe, it’s much more attractive” and they “have been more aggressive in their pricing.” “They’re very comfortable paying a higher price for what potentially could be a more superior product,” says Shaw.
He says both “investors in Asia and foreign investors into Asia are looking higher up the risk curve,” especially with the availability of cheap debt they can use to increase their leverage. A lot of Asian developers already have a foothold in emerging markets such as Vietnam and Cambodia. Low land costs and strong economic growth make them attractive, Shaw says. “These markets will appeal more to opportunistic investors.” ■ Dean Askin 27
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GOING SHORT-TERM GLOBALLY FOR BIGGER PROFITS IN 2016 “There’s a somewhat global capital market that’s very much inﬂuenced by what I call ‘the triple low,’” Gordon says. “It’s characterized by low inﬂation, low interest rates and generally low or disappointingly low gross domestic product growth. Jacques Gordon Global Investment Strategist, LaSalle Investment Management
Ironically, says Gordon, this triple low has “created a triple high for real estate investments in wealthy countries.” The triple high is made up of “capital close to real estate values, all-time highs and performance.” Countries experiencing this triple high include Canada, the U.S., the UK, France,
Real estate investors who build their portfolios with short-term lease properties in 2016 as far abroad as Australia, eastern China and even Japan could have a very proﬁtable year. That’s the prediction of Jacques Gordon, Global Investment Strategist at LaSalle Investment Management.
GERMANY IS AS STABLE AS SHE GOES
Brad Olsen President, Atlantic Partners Germany continues to establish itself as a major player among global real estate investors, says Brad Olsen, President of Atlantic Partners. Olsen says there’s been “a tremendous increase” in interest in the German real estate market from international investors. “Basically, because everyone perceives that this is for investors 28
dominant theme in many countries,” he says. Gordon says net operating income (NOI) and cap rates will keep rising in the low-interest rate environment. The question is whether NOI will rise fast enough to keep pace with cap-rate increases. “It’s going to be a race between NOI and cap rates,” Gordon says. Investors need “to think about how it’ll affect their portfolios,” he explains. “In some cities NOI will keep pace, in others, perhaps not.” He believes “short-term leases will do best” in this race, suggesting investors look at hotels, apartment buildings and self-storage warehouses. “These three property types could do best in the short run,” Gordon says.
“It’s going to be a race between NOI and cap rates.”
He acknowledges short-term lease properties are riskier. But Gordon believes investors will see faster NOI growth with them.
and even Japan and Australia. There are also good opportunities in tier-one cities within eastern China, adds Gordon.
Gordon says investors also need to consider geopolitics. “Asia-Paciﬁc has its handful of risks and issues to think about, but every part of the world does,” he says.
“You’ve got this theme going looking into 2016 where the triple low is going to be the
■ Dean Askin
that are looking for core or core-plus types of investments, maybe the so-called ‘hot money,’ the opportunistic money has gone to southern Europe, Spain and Italy,” says Olsen. “But those individuals looking for stable cash ﬂow have been ﬂocking to Germany.”
“The next-generation of investor type was looking for more yield than pure core, so there have been development joint ventures from logistics and retail acquisitions. Generally speaking, the pure core plays, the very stable ofﬁce buildings, major markets like Munich, had been acquired either by domestic partners or by sovereign-wealth kinds of investors from Asia and the Middle East.
Olsen says the trend started with German institutional investors, “who stayed with the market through the post-crisis period as a place to put their money. But we’ve now seen movement of capital from pretty much all across the world. If it wants to be in stable real estate in Europe, it’s gone ﬁrst to London and next to the German markets. “As it relates speciﬁcally to the North Americans … Canadian investors were early in the game discovering Germany, but they have been, for the most part, focused on a strategy of more value added-orientated.” Olsen cites Dream Global REIT as an exception. “Dream went in early and bought, I would say, a smaller portion of smaller core assets and then followed up with a series of acquisitions of very major ofﬁce projects in key markets, and maybe I would call those core or core-light,” he says.
“[I’m] not seeing a lot of that capital come from North America because, candidly, they’re looking for more return than they can get by core in Germany,” Olson adds. Hot spots, Olsen says, include the ofﬁce sectors in Munich, Frankfort and, more recently, Hamburg. “Probably, the single hottest sector in Germany for the last 12-24 months has been residential,” he says, adding logistics, along with residential, has beneﬁtted from investors willing to take more risk. “There’s an enormous amount of capital and much of the capital will involve the development of more logistics projects,” Olsen says. ■ Alex Frazer-Harrison Canadian Real Estate Forum / WINTER 2015
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U.K. INVESTORS URGED TO SEEK REGIONAL OPPORTUNITIES: ESCHEW THE BIG CITIES FOR OUT-OF-THE WAY POCKETS Edinburgh – and then everywhere else is viewed as being too small for institutional investments, but I think that’s not the case,” says Neil Cable, Head of European Real Estate at Fidelity International.
Neil Cable Head of European Real Estate, Fidelity International While discussion of real estate opportunities is often limited to London or the Big Six cities in the U.K., there is potential for income generation throughout the region that is often overlooked. “There is quite a wide range of cities attracting investors. People tend to only talk about the six main ones – Birmingham, Bristol, Leeds, Manchester, Glasgow, and
“There’s lots of opportunity in many different pockets for pension fund investors, particularly globally, to ﬁnd interesting sources of growth and diversify their sustainable income.” Locations like Cardiff, which boast a diverse economy and mix of tenants and a very low supply are particularly of interest, says Cable. “You can pick up a yield premium there and still experience growth - that way you get some performance in the bank before you even start and minimize your risk.” Other micro markets west of London that Cable favours include the M4 corridor that skirts past the Heathrow Airport and the M3 corridor, site of many tech companies in the
U.S. MARKET READIES ITSELF FOR INVESTMENT BOOM: ECONOMY ABOUT TO START MAJOR UPSWING CEO of National Real Estate Advisors. “We struggled in 2008, 2009 and 2010 there was a lot of overhang debt related to the housing industry and consumer debt, which has since been taken care of. The foundation is in place for a solid recovery and more capital is coming into the country.” Jeff Kanne President and CEO, National Real Estate Advisors Between solid employment growth, major technological advancements and a legal system people can depend on, one might easily argue that the U.S. is the world’s best economy in which to invest. Jeff Kanne would certainly agree. “Our economy is about to start a major upswing, barring disruptions from geopolitical events,” says the President and 30
The apartment market is particularly hot right now in America, sought by both baby boomers and millennials, says Kanne. “That trend will continue for a few years until the millennials get married and move to the suburbs.” Data centres are among the most robust part of the economy, he adds - “The growth and demand there is almost insatiable. If you’re in the right position - it’s the best investment I can think of.” Kanne has also observed a keen interest by sophisticated foreign investors in sustainability. “By building new buildings we eliminate a lot
1990s and which suffered from an oversupply which has since dwindled. Interest in specialized sectors such as social housing, student accommodation, healthcare, and residential properties is also on the rise, says Cable. “From my point of view, some parts of the market outside London look very attractive considering the interest rate environment we’re in and even if rates rise, as long as they don’t spike too rapidly.” Traditionally, foreign investors tend to look at ofﬁces ﬁrst when they come into any market. “It’s a natural ﬁrst port of call – everyone is familiar with them and they’re more liquid in major cities,” says Cable. Investor interest is also apparent in the logistic asset class, which has changed drastically due to the changing face of retail. “With a warehouse nowadays, what you’re buying into is economic growth, rather than a shop on the high street. Now the shop window is your laptop or iPad and the premise is a big warehouse, which is distributing goods to consumers and tapping into growth through Amazon or smaller players making use of the internet.” ■ Barbara Balfour
of competition. We also end up with modern, efﬁcient buildings. If you want real estate assets to hold their value, location is one thing but sustainability and technological advancement are just as important.” Many investors are buying assets and holding on to them for a prolonged period of time, making good acquisition opportunities even scarcer, says Kanne. “I think that’s one argument for why you should be willing to pay low cap rates and high prices in the market today, because some of the best properties are going off the markets and staying that way for a while. “Given the low cap rates in the country and the fact we’re going to have to buy at low cap rates, depending on the hold period, we could ﬁnd ourselves in a long period of very low returns once we see rising interest rates and cap rates. “Because of yields, there is more Interest in secondary markets, but I think that’s a minor part of the market. Even if you’re willing to take that risk, the assets are just not big enough and liquidity is deﬁnitely an issue.” ■ Barbara Balfour Canadian Real Estate Forum / WINTER 2015
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STRUGGLING ECONOMIES ABROAD A LONG-TERM GROWTH OPPORTUNITY: LONG-TIME GLOBAL INVESTORS INCREASING THEIR HOLDINGS “The scenario for Brazil can be best described as one with near-term distress followed by long-term growth,” says Heidtmann.
Dietrich Heidtmann Managing Director, Head of International Capital Markets, GTIS Partners
As the world’s seventh largest economy in terms of purchasing power, Brazil has attracted strong interest from foreign buyers since 2000. But now that the market is in recession, investors have been reacting by selling emerging markets holdings and asking questions later, says Dietrich Heidtmann, Managing Director and Head of International Capital Markets at GTIS Partners. 32
“The publicly listed real estate companies have signiﬁcantly underperformed the broader market index, and are trading at a huge discount to book value. In the private markets, we have seen a very limited amount of completed capital raises.”
“Many see the current economic scenario as an interesting diversification opportunity for their overall portfolio.” The recent decline in the Brazilian Real has created signiﬁcant losses in US dollars and investors looking for stable returns are very cautious when looking at the Brazil market. However, a number of long-time global investors in the country’s property sector see the combination of a cyclical low in property valuations with a cyclical low of the currency versus the US dollar or Euro as an incentive to increase their holdings, says Heidtmann.
“Many see the current economic scenario as an interesting diversiﬁcation opportunity for their overall portfolio, given that most other investable markets are trading above previous peak valuations and a change in the global interest rate cycle undoubtedly will have impacts on the valuation in these markets as well,” he says. From iron ore and copper to coffee and ethanol, Brazil continues to produce what the world needs and with improved terms of trade due to currency declines, the trade balance has turned signiﬁcantly positive since the beginning of the year. As a net importer of oil, the economy is also beneﬁtting from lower oil prices, says Heidtmann. But all the negative headlines around Brazil’s economy and political situation have led investors to explore neighbouring countries, concentrating on the housing sector as a self-liquidating strategy. However, these countries are also not without their challenges, with fewer institutional platforms that can serve as local partners, says Heidtmann. Mexico remains one of the better choices, he advises. “Helped by its direct border with the United States, Mexico has long been a destination for institutional capital with investors focusing on the residential and the housing markets,” says Heidtmann. ■ Barbara Balfour Canadian Real Estate Forum / WINTER 2015
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Canadian Real Estate Forum / WINTER 2015
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IT IS, ONCE AGAIN, A
NEW WORLD Jane Gavan President, Asset Management, Dream Unlimited Corp.
A lot can change in 12 months. When we last met at the Real Estate Forum a year ago, Canada had a different federal government and a different Prime Minister. Alberta had a different provincial government—and oil cost $90 a barrel. Yet even all those months ago, the plunge in Canadian dollar value was becoming apparent. Thankfully, anticipating and facing change is what real estate investors do best. We adapt to ever-evolving markets that reﬂect an ever-evolving world. If you’re wondering how the Canadian economy will hold up in an overall environment of potentially rising bond market interest rates, you’re in good company. Your industry peers have also witnessed a very slow-growing economy in general, and a commodity complex that is under some pressure. This Forum is the right place to vent your concerns, share exciting prospects and venture predictions for 2016. While you’re here, take the opportunity to learn from real estate experts as they present their unique – and often refreshingly optimistic – views on the future. In the wake of the Federal Election, developers across the nation are anxious to know: What will be the impact of this infrastructure spending that government has committed to? How will that spending affect the economy, employment, and city spending? What will be the ripple effect when people are spending more on taxes?
On the slippery issue of oil, we expect that this week’s conference attendees will be interested to hear about how a crash in oil prices will impact on Alberta and, more broadly, on Canada. So far, no one is quite sure whether we are experiencing a cyclical event or a longer-term, fundamental structural change. If it is cyclical, how long will it endure before we see recovery in the oil industry? If, on the other hand, we are seeing a fundamental long-term adjustment, what impact will it have on the structure of Alberta’s economy, on commercial real estate and on the income-producing real estate world? In 2016 every real estate sector will face its own challenges and opportunities. How will industry and tenants respond to new supply in the ofﬁce market? On the retail side, what will be the fallout to last January’s demise of Target Canada? Are people ﬁnding entirely new ways to think about retail? Finally, industrial real estate investors are eager to ﬁnd out whether or not they will beneﬁt from a high U.S. dollar. Also, will the slide in oil prices be good or bad news for that asset class? Everybody is thinking about capital. We want to know where it will come from in 2016 and what sorts of returns will be sought. Where are the big opportunities in Canada? Some of us even look for adversity—which can provide tremendous opportunity to people with the wherewithal to take advantage of it. Welcome to an important event. We encourage you not only to listen, but to add your voice to the discussions on these critical, exciting issues that affect all Canadians. ■ Michelle Morra-Carlisle 37
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THE ALTUS REPORT
IS BIGGER BETTER? A FRESH LOOK AT PERFORMANCE INDICATORS
Sandy McNair President, Altus InSite
One size and one approach will rarely suit everyone. With many of Canada’s ofﬁce markets pivoting and moving closer to a valley ﬂoor than a peak we thought this might be an appropriate time to explore the merits of larger portfolios. Some industry participants focus on the ‘economies of scale’ beneﬁt of being bigger, with emphasis on purchasing and pricing power with the advisors, the suppliers and the many trades involved in operating buildings so that they meet or exceed the expectations of occupiers, investors and other stakeholders. Another view is that ‘competencies of scale’ is the key beneﬁt of being bigger. The ability to recruit, grow and retain the very best people by offering them challenging and rewarding work and career paths is being cited as a key differentiator and performance accelerator. A third take is that culture and pace matter most and the ﬁrm that is ‘nimble and responsive’ will outperform the rest regardless of size. Going further and with a nod to Darwin, perhaps it is the ﬁrm that most effectively evolves and adapts will consistently thrive and outperform. During the past 15 years, driven by the investment appeal of commercial real estate, ownership and management has become more concentrated. Pension funds, Real Estate Investment Trusts and publically listed real estate ﬁrms along with their subsidiaries and fee managers have
become the largest managers in each of the six major ofﬁce markets across Canada. However, privately held ﬁrms and funds have also grown and thrived while many niche or boutique operators have thrived as well. This pattern of concentration is repeated to varying degrees in retail, industrial, apartment rental, condo and housing development, development land, seniors housing, student housing, timberland and the agriculture sectors. Access to capital, both debt and equity, for acquisitions, upgrades, repositioning and repurposing is much less of a variable or constraint across small, mid-size and larger portfolios than it was 15 and more years ago. Larger ﬁrms may still have an advantage, just not as signiﬁcant as in decades past. Another driver of outperformance relative to peers is the ability to proactively listen to your tenants and to identify and implement the key improvements that will materially impact tenant retention and in turn ﬁnancial performance. Portfolio size need not impact the commitment and culture needed to listen well and take the most appropriate actions. So enough with the opinions, what might the facts reveal? We have explored the subject from multiple perspectives, including portfolio size, building size and typical ﬂoor plate size. Given the space constraints of this article we will share only the high-level ﬁndings. For readers with an appetite for detail and a deeper dive, please reach out for us by email. Canadian Real Estate Forum / WINTER 2015
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For each of Canada’s six major ofﬁce markets we looked at the entire city-wide inventory with Class A, B and C combined, then the Downtown Market with Class A, B and C combined and then only the Downtown Class A Market. We then ranked the ofﬁce building managers by size (total ofﬁce area in each portfolio) and segmented them into three buckets – the 5 Largest Managers, the Next 10 Largest Managers and Everyone Else. Lastly we looked at the total Inventory, the total amount of space Available for lease and total amount of space currently Vacant. The simplistic approach taken has been to initially look for clusters of portfolios that outperform. More speciﬁcally outperformance typically occurs when the portfolios are leased and occupied. The pie charts reveal the proportion of the total inventory managed by each of the three sizes or clusters of
managers as well as the proportion of the total space available for lease and the proportion of the total space that is currently vacant. Expressed another way, outperformance occurs when a portfolio is underweight available space and vacant space, that is their proportion of the total inventory exceeds their proportion of the available space and vacant space. We have tracked both available space and vacant space to better identify and understand current dynamics and the impact of tenants that have committed to move but have not yet completed the moves to new or different space. For example in Downtown Calgary Class A the 5 Largest Managers manage 66% of the inventory which contains 51% of the space available for lease and 40% of the space that is currently vacant. The implication here is a net 11% of the space has committed to vacate, but these moves have not yet happened due to the timing of completion of their ofﬁces in new or existing buildings with the result that all other things being equal, vacancy will increase in the future. In Downtown Edmonton Class A the opposite
dynamic is in place where the 5 Largest Managers manage 51% of the inventory that contain 37% of the space available for lease and 44% of the space that is currently vacant. All other things being equal, for the 5 Largest Managers in Downtown Edmonton Class A can expect vacancy to decline in their combined portfolios in the future. Like all simpliﬁed analysis this one needs to be viewed with caution. Averages are dangerous. The speciﬁcs of each property and manager vary widely and matter. It is essential to dig deeper into the details to prepare a portfolio-speciﬁc and likely property-speciﬁc plans prior to taking action. A time series will generate better information and perspective. Our goal in this article and related work is to get the conversation started by exploring the topic of outperformance in fresh and compelling ways. When preparing portfolio and property plans that may include property upgrades, leasing strategies and initiatives to enhance operational excellence it will be important to know if the wind is at your back or in your face. Once again, the speciﬁcs vary widely and matter.
Do the Largest Portfolio Managers Generate Superior Performance? An Analysis of Ofﬁce Building Manager Share of Total Inventory, Share of Total Space Available for Lease and Share of Total Space Currently Vacant Source: © Altus InSite, a division of Altus Group, data as October 22, 2015
Downtown Ottawa - Class A
Downtown Montreal - Class A
Downtown Edmonton - Class A
Downtown Ottaw a
23% 36% 41%
30% 38% 32%
32% 46% 22%
Downtown Vancouver - Class A
14% 30% 56%
Downtown Calgary - Class A
5 Largest Managers 5 Largest Managers Next 10 Largest Managers Next 10 Largest Managers Everyone Else Everyone Else
12% 37% 51%
15% 25% 60%
47% Downtown Toronto - Class A
9% 35% 56%
© Altus InSite, a division of Altus Group Limited, data as at October 22, 2015.
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The results this analysis? Here are a few key ﬁndings: • In all three views of Toronto (GTA Class A, B and C combined; Downtown Class A, B and C combined and Downtown Class A) the 5 Largest Managers currently outperform with Vacancy being underweight Inventory. However, without a shift in leasing activity, the 5 Largest Managers in each of the three views can be expected to underperform the Next 10 Largest Managers and Everyone Else as evidenced by the 5 Largest Managers being overweight Availability relative to their proportion of total Inventory. • In both views of Downtown Montreal the 5 Largest Managers outperform with both Availability and Vacancy being underweight Inventory. When the view is changed to all of Montreal, the 5 Largest Managers slightly underperform and Everyone Else slightly outperforms, indicating that in the Montreal suburbs the boutique and small managers signiﬁcantly outperform. • In all three views of Vancouver, manager size currently has the least impact on performance with the 5 Largest Managers, the Next 10 Largest Managers and Everyone Else being close to even-weight on both Availability and Vacancy. The 5 Largest slightly outperform in Vancouver Downtown Class A. Likely driven by slow lease-up of recently completed new supply in the suburbs, the 5 Largest Managers slightly underperform across all of Vancouver. • In all three views of Calgary the 5 Largest Managers signiﬁcantly outperform the two other categories of manager based upon portfolio size. The gap between Availability and Vacancy suggest without an increase in leasing activity and growth in occupied area, all
three categories of manager based upon portfolio size will see increases in Vacancy in the future. • In all three views of Edmonton the 5 Largest Managers and Everyone Else are currently experiencing outperformance at the expense of the Next 10 Largest Managers who are underperforming. • In Ottawa the signals from this analysis are mixed, which may be an accurate reﬂection of reality. The Federal government is the dominant occupant and is in the process of moving to a strategy of more intensely using less but better space, some of it located outside of downtown. Since the Federal government can vacate and occupy entire buildings the impacts are felt on portfolios of all sizes. So is bigger currently better? While additional and manager-speciﬁc work is needed this simpliﬁed analysis indicates that the bigger managers currently and in many locations do generate better performance. Another look at ‘is bigger better’ addresses building size. Very similar to the approach taken above we segmented the inventory into three building sizes – Very Large > 400,000 square feet; Large 100,000 to 400,000 square feet and Medium being 20,000 to 100,000 square feet. The results are equally detailed and generate another 54 pie charts, which we do not have room for here. However, a few ﬁndings are: • In the GTA the inventory is 26% Medium sized buildings, 47% Large sized buildings and 27% Very Large sized buildings. The GTA Very Large sized buildings outperform with only 18% of the Available space and 13% of the Vacant space. • When looking speciﬁcally at Downtown Toronto Class A, the Very Large sized buildings continue to outperform but by a narrower margin with 73% of the inventory, 65% of the Available space and 69% of the Vacant space. • In all three views of Calgary Very Large sized buildings currently outperform. • In Ottawa Downtown Class A Large sized buildings outperform with 68% of the inventory, 46% of the Availability and 56% of the Vacancy, while Very Large sized buildings underperform with 29% of the inventory, 46% of the Availability and 37% of the Vacancy.
• In Montreal Downtown Class A, Very Large sized buildings outperform with 77% of the inventory, 63% of the Availability and 68% of the Vacancy. Yet another take on ‘is bigger better’ addresses typical ﬂoor plate size. In the prior edition of this publication we segmented the inventory into buildings with small, medium and large sized typical ﬂoor plates using 16,000 square feet and 29,000 square feet as the break points. Those results include: • The proportion of the total inventory that is in buildings with Large typical ﬂoor plates ranges from highs of 42% in Montreal and 38% in Ottawa to lows of 18% in Vancouver and 13% in Edmonton. • With the exception of Greater Vancouver and Downtown Ottawa Class A, the buildings with Large ﬂoor plates outperform with lower proportions of the total space Available for lease. • In all three views of the GTA buildings with Medium sized ﬂoor plates underperformed buildings with Large and Small sized ﬂoor plates. • The pattern in the other ﬁve major markets (that is all major markets excluding GTA) is that buildings with Medium sized ﬂoor plates outperformed buildings with Small sized ﬂoor plates. So is bigger better? The market always makes room for the nimble, smart boutique with great listening skills. But based upon this simpliﬁed look at the current data they are the exceptions, not the normal path to outperformance. We have more work to do, both back testing and looking at more variables, leading indicators and key attributes to superior performance before anyone should focus on retaining only the largest managers, for very large buildings with large ﬂoor plates. And here is a ﬁnal thought – not having answers to the right questions is often preferred to having answers to the wrong questions. ■ Sandy McNair is the President of Altus InSite, a division of Altus Group. Since 1997 Altus InSite has conducted more than 1.9 million tenant satisfaction surveys for many of Canada’s leading office building owners and managers. firstname.lastname@example.org www.altusinsite.com
Canadian Real Estate Forum / WINTER 2015
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2016 OUTLOOK: BUYERS ARE READY, PRODUCT WILL COME
Avtar Bains President, Premise Properties According to Avtar Bains, President of Premise Properties in Vancouver, everyone will want to buy real estate in 2016. Whether public, private, onshore, offshore, institutional, ethnic, he says, there isn’t a single classiﬁcation of buyer group that is not keen on developing their portfolio at this time. “There’s never been a better time in Canadian history for having high market value and high market liquidity at the same time,” Bains says. Notwithstanding the
WISE RETAILERS ON-BOARD WITH OMNICHANNEL
John Williams Senior Partner, J.C. Williams Group.
Omnichannel, the sales approach that creates a seamless shopping experience through desktop or mobile device, phones and bricks-and-mortar stores, has 44
fact there is much more demand than supply within the Canadian landscape today, he is conﬁdent that product will come. It will potentially come from the institutional community, the market (with third-generation Canadian families), offshore trading, and REITS, with proﬁt taking and portfolio balance as the big motivators.
“There’s never been a better time in Canadian history for having high market value and high market liquidity at the same time.” Although REITS tend to be long-term holders, he explains that every REIT recognizes that the market changes. “Because the market is ﬂuid, and because Canadian executives by and large are really in tune with the marketplace, they will always be looking at culling what is not a long term asset and trying to take that capital and invest what is a long term asset,” he says. “Just because you bought something 15 years ago at great value doesn’t mean that is the best asset today for your portfolio mix.” become essential to retailing. “It can no longer be viewed as an exotic addition that you may or may not want to have in part of your business,” says John Williams, Senior Partner, J.C. Williams Group. He cites the evidence: 97 per cent of Canadian consumers use digital communications; almost 70 per cent are relatively frequent online shoppers; and about 80 per cent research a product before buying it. How can retailers and malls compete effectively against online offerings? While statistics indicate an unwavering popularity of online purchases, Williams maintains that stores and malls remain people’s favourite places to shop. For retailers opening stores, the inner city is the new frontier. The suburbs are reasonably well covered and, in some cases, even over-saturated with big box formats. Meanwhile, the inner city has residents who generally earn average or higher-than-average incomes. It also has tremendous density and as a result, Williams says, “Retailers are locating there in new locations like 2nd ﬂoor, and new formats that are smaller than suburban formats.” Regardless of location, stores must ﬁnd ways to compete with the Internet. “In order
As for markets, Bains expects Vancouver and Toronto will dominate the scene for the foreseeable future. He adds, however, that yield or value buyers—those looking for cash ﬂow—may be driven to the mid markets instead, ranging from Victoria to Halifax to Winnipeg, where the cap rate is greater than the borrowing rate. Across the border, major markets continue to dominate. For 2016 Bains expects to see a lot of institutional involvement from Canadians, partly because U.S. markets are bigger, there’s more supply, and the pricing in some respects brings more value than in parts of Canada. Canadians who invested in the U.S. when the dollar was essentially at parity, he says, did very well. Today there are Canadians selling real estate to take advantage of the liquidity in the market, the value in the market, and the exchange rate – another example of proﬁt taking as a motivator. “I also think private capital will continue to migrate to America,” he says, “although it’s been tempered somewhat given the delta between the Canadian and the American dollar this past year.” ■ Michelle Morra-Carlisle
to combat the online shopping experience, the retailer and the malls have to offer a dynamic, exciting, ‘worth the trip’ experience and environment,” Williams says. “This is going to require all the bricks-and-mortar team to rethink, revamp, revitalize and reinvent their physical experience.” This, he explains, means recognizing that for many consumers, even an in-store shopping experience starts with a visit to a website. Retailers need to keep pace with the mobile, handheld approach to buying, and consider different delivery options, whether to the customer’s home or work, or in-store pickup. In some ways, retail in the digital age is actually a look back in time. Williams likens online shopping to the old catalogue, except that instead of a thick book, retailers use a website; and instead of taking orders by phone or by mail, they respond digitally. He says the omnichannel approach can be very effective when properly implemented. “A retailer can have a smaller footprint yet have thousands of items online,” he says, “well beyond what they could ever carry in the store or what would be economical to carry in the store. ■ Michelle Morra-Carlisle Canadian Real Estate Forum / WINTER 2015
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BREATHING LIFE INTO RETAIL THROUGH MIXED-USE DEVELOPMENT
Fred Waks President and CEO, Trinity Development Group Inc. Forward-thinking retailers deliver what online shopping can’t. To provide the best possible shopping experience to customers, it’s important to consider the elements that would
NORTH AMERICA, EUROPE TO GROW IN 2016
make them want to stick around for a while. “Parking that’s accessible and covered, wider sidewalks and boulevards, access to transit routes – those are the aspects of a user-friendly living, working and retail space that enable people to stay on the premises and have a complete day of shopping,” says Fred Waks, President and CEO at Trinity Development Group Inc. A leader in mixed-use developments, Trinity relies on a work/live/play model similar to their successful Lansdowne Park redevelopment project in Ottawa. They currently have 17 active developments under construction in Toronto, Mississauga, Ottawa, and Calgary. “As much as you hear how bad it is out there, we’re meeting with our tenants and ﬁnding that in the urban scenarios, from food stores and junior department stores to home improvement centres and drugstores, they’re all still very active. We’re ﬁnding that the markets in Ottawa, Toronto and even Calgary– believe it or not – are still quite buoyant,” says Waks. “In fact, in Calgary, neither rents nor interest rates have come down. For our project right by Olympic Park called Trinity Hills,
sluggish growth but the economic fundamentals of an abundance of natural resources, water, energy and a highly educated population has not changed” Debt capital is just too cheap to pass up, Welch argues. “The inexpensive leverage makes a lot of sense, if you can buy the right assets at the right cost per square foot,” he suggested. “Financed prudently, you’re bound to create wealth.”
Blair Welch Co-Founder, Slate Asset Management
There are a lot of disconnects between what the core money wants and what the rest of the real estate market needs.”
Blair Welch is bullish on Canada and he’s not alone.
Welch recognized that there’s a tidal wave of capital chasing the same types of product bidding up prices, but he sees ample entrepreneurial opportunity in mismatches that arise from market inefﬁciencies.
“If I had foreign dollars and was sitting outside of Canada, it would be time to buy,” said Slate Asset Management’s co-founder. “The Canadian economy has entered into a cycle of a low dollar and
“There are a lot of disconnects between what the core money wants and what the rest of the real estate market needs,” he asserted. “That’s true across all countries and across public and private markets. That’s what to exploit.”
everyone has been producing offers at rents that are the same as before the oil crisis. “I wouldn’t want to be in the ofﬁce business there, but the retail business still seems to be thriving.” Waks has observed a deﬁnite bifurcation in the market between supermalls and smaller, enclosed malls in secondary and tertiary markets in need of revamping. The secret to retail success lies in understanding that despite the popularity of online shopping, people are still social beings, says Waks. “I just had a meeting with Heather Reisman of Indigo last week, who is expanding her product line and her stores. While she has an online business, she recognizes that people still want to go out and have a shopping experience with the whole family, so she has created a small specialty department store. “Retailers have to move with the times and change their offerings to reﬂect what’s happening in those markets; if they don’t, they’re not going to be here for a long time. Those who are forward-thinking, understand their customer needs and meet them will enjoy tremendous success.” ■ Barbara Balfour Historically, macro fear and uncertainty produces price discrepancies in some markets, and 2016 will be no exception.” Welch forecast. “We’ll continue to go where other people won’t.” Beyond North America, he sees opportunities in Europe next year. “It’s a big market with low interest rates coming out of a downturn,” Welch observed. “We’ll take our time and be careful, but we want to be in Europe.” He downplayed foreign exchange risk in overseas investment. “Real estate transactions should focus on the fundamentals of supply, demand, rents and so forth,” Welch insisted. “Obviously you have to factor in currency, but that shouldn’t be the deciding factor.” For 2016, Welch plans to continue focusing primarily on ofﬁce and retail properties. “We own and operate real estate coast-to-coast in Canada as well as in 20 American states,” he said. “We focus on identifying assets at the right price in the right neighbourhood and can ﬁx it up and lease or sell it. ■ Robert Frank Canadian Real Estate Forum / WINTER 2015
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CHOOSE LAND OVER SKY: GAZIT-GLOBE INVESTMENT STRATEGY CONSIDERS FUTURE ALTERNATIVE USES FOR ITS PROPERTIES Dori Segal Chairman, First Capital Realty Inc., Executive Vice Chairman, Gazit-Globe, Vice Chairman, Equity One, Inc.
Buildings depreciate. But land is an appreciating asset â€“ thatâ€™s why most of the value of Gazit-Globeâ€™s business is not in buildings. â€œThatâ€™s the strategy of our group â€“ we try to position our properties on land where there are more alternative uses like residential units,â€? says Dori Segal, Chairman of the Board, First Capital Realty Inc., Executive Vice Chairman, Gazit-Globe and Vice Chairman, Equity One, Inc. â€œThe 50,000 sq. ft. supermarket of today could shrink to 30,000 sq. ft. in 10 years, with a drive-through for customers who ordered online to come pick up their merchandise. I see that combined approach more and more with the advent of e-commerce.â€? In times of recession, shopping centres are unique from other asset classes such as ofďŹ ce and apartment buildings, says Segal. â€œIn a well-located retail property, tenants are not so
likely to exit because they realize it might be very hard to get in. â€œRent is not the only factor in determining your location. If youâ€™re in a great corner and someone offers you a cheaper secondary location with less trafďŹ c and access, most will not go for it. But you will walk two blocks for much cheaper rent if youâ€™re in an ofďŹ ce or apartment. â€œWhen the economy slows down, less occupancy is better for ofďŹ ce or residential tenants. There are fewer lineups for the
â€œThe 50,000 sq. ft. supermarket of today could shrink to 30,000 sq. ft. in 10 years, with a drive-through for customers who ordered online to come pick up their merchandise. I see that combined approach more and more with the advent of e-commerce.â€? elevator and the parking garage, for example. But with only 80 per cent occupancy in a shopping centre, developers have to decide whether thatâ€™s an opportunity or trap. â€œIf they cannot improve performance over time, they will not remain shopping centres for long.â€?
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With regards to the Canadian market, Segal sees immigration policy as a signiďŹ cant positive aspect, setting it apart from the U.S. and Europe. â€œThe Canadian government is much more interested in immigration and this is positive from a demographic perspective. Other countries not so interested in dealing with immigration are not doing a good job in terms of policy â€“ education, housing, jobs, etc. â€“ which are also positive for the economy. â€œHowever, on the negative side, resource-based economies are not doing well right now. To balance this, itâ€™s important to be more innovative and look to other parts of the economy to carry the weight â€“ the government plays a signiďŹ cant role in this.â€? â– Barbara Balfour
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Canadian Real Estate Forum / WINTER 2015
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KEY TO SUCCESS BASED ON CUSTOMER SERVICE, NOT FINANCE
we’re in the customer service business,” says Managing Partner Jon Love.
submarket to determine the value proposition for the customer.
“It’s true that, compared to ﬁve years ago, today’s operating environment is more challenging. In that context, the organizations that possess better operating strategies, skills, resources, people and on the ground presence will outperform those who have generated returns largely through ﬁnancial engineering.
“What an owner can do ranges from strategic capital improvements to ﬂexibility in
“At the end of the day, our returns are all driven by customer satisfaction, which in turn are driven by improved leasing results.”
Jon Love Managing Partner, KingSett Capital Despite current challenges in operating environments and the economy, KingSett Capital’s strategy for optimizing returns in 2016 is no different from previous years. “All too often we think of ourselves in the ﬁnance business, but in fact
In the competitive and transparent market in which they do business, returns are rarely driven solely by the buy or the sell, says Love. The transaction itself and the acquisition that is subsequently made is only one of several integral components. “You need the transaction to be in the game. You need to buy an asset to work it. But ultimately, value is created and premium risk weight returns are driven by the most optimum leasing strategies you can provide, and being able to offer premium value to your customer,” he says. The key elements to providing that value to customers vary between each asset class. In the case of an ofﬁce asset, it’s crucial to understand the intricacies of the market and
DOWNTOWN RENAISSANCE on King Street West, near Spadina Avenue.
Michael Emory President and CEO, Allied Real Estate Investment Trust Millennial tastes, rising immigration and infrastructure intensiﬁcation are driving the current urban core expansion in Toronto. Success in the Toronto real estate market depends on value-driven development, creativity, and an understanding of the economic realities of business owners who want to live and play where they work, says Michael Emory, President and CEO of Allied Real Estate Investment Trust and the visionary behind the urban renewal 50
“The demand for living space and workspace in the urban core of major cities is broad and deep,” said Emory. “It has been growing since the mid-1990s, and the momentum appears to be accelerating as city builders create a more diverse, rich and interesting urban environment.” Emory can take credit for some of that diversity since his company is behind several popular mixed use spaces created from once run-down 19-century industrial buildings. The unusual strategy helped Allied REIT grow from a small private investment developer in 1992 through initial public offering in 2003 to become the inﬂuential trust company it is today. Allied has been behind some of Toronto’s most innovative projects, each of which enabled Emory to implement value-driven philosophies he recognized in the market. “In Toronto, the best examples of innovation are the south core, the success of environmentally responsible ofﬁce
“All too often we think of ourselves in the finance business, but in fact we’re in the customer service business.” lease negotiations or in structuring tenant contracts – there’s a whole variety of ways to add value to a customer,” says Love. “In the case of an industrial asset class, it’s about maintaining the assets that have value to that market and submarket, but this is different city by city, so value strategies should be tailored to individual markets.” While market opportunities and challenges ﬂuctuate day by day, the overall secret to success has not changed, says Love. “Our biggest focus with the assets we own is on trying to create a premium offering to our customers and leasing those properties as aggressively as we can. “As to new investments, we’re always seeking ideas for where we think we can create a premium risk-weighted return.” ■ Barbara Balfour construction, the emergence of Class I ofﬁce space, the expansion of storefront retail space, the condo boom and the emergence of purpose-built residential rentals,” he says. Thinking about purpose-built residential trends led Emory to his latest strategy. Most of his heritage buildings currently house ofﬁces on the upper ﬂoors and storefront retail on the street. In the coming years, many of them will be topped with steel and glass towers. The new spaces will be large-space rental accommodation for families, which are in heavy demand in the city and haven’t been built for years. Emory says he’s conﬁdent that building rental units will allow is company to beneﬁt from the underlying economic forces driving Toronto’s real estate market, which he thinks will be in play for some time to come. “The momentum from the mid-40s to the mid90s favoured the suburbs,” he said. “I suspect the momentum now favouring the urban core is what investment professionals refer to as a “secular trend”, which is to say something that isn’t likely to change anytime soon.” ■ Tracey Arial Canadian Real Estate Forum / WINTER 2015
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OXFORD SEES ‘STEADY VALUE’ IN CANADIAN MARKET
Blake Hutcheson Chief Executive Officer, Oxford Properties Group Oxford Properties Group is well positioned for optimism. The organization owns the Fairmont Banff Springs Hotel, Yorkdale Shopping Centre and (among countless other projects) is co-developing with Related, the high-proﬁle Hudson Yards project in West Manhattan that includes ofﬁce, retail, hotel, residential and school developments, with often extraordinary returns.
Describing the current real estate landscape in Canada, Blake Hutcheson, Chief Executive Ofﬁcer of Oxford Properties Group, uses the operative word “ﬁne.” “It isn’t a big growth story but remains a sustained, steady value story,” he says. “The fundamentals in Vancouver and Toronto are better than elsewhere in Canada and we’re watching fundamentals closely in terms of ofﬁce space. And our retail portfolio because of its very nature – it’s great retail – is doing well.” He adds that relative to Oxford’s activity in the U.K. and the U.S., their Canadian developments are not doing nearly as well from a capital appreciation standpoint. “But we continue to selectively cull a bit of Canada but we’re committed to the country, committed to the portfolio, and things are ﬁne,” he says. Outside of Canada, Oxford continues to build its business primarily around the markets of Boston, Washington and New York. In Europe, the organization is clearly focused around London and Paris. Despite a weak Canadian dollar, Oxford is generating yields. In fact, the currency is serving them well. “You don’t hedge your proﬁts,” Hutcheson explains. “So when you get upward appreciation in the U.S. and U.K., you get it in U.S. dollars. Luckily we’ve been dealing with proﬁts and signiﬁcant marks in those areas, so we hedge our
“When you get upward appreciation in the U.S. and U.K., you get it in U.S. dollars. Luckily, we’ve been dealing with profits and significant marks in those areas, so we hedge our original investment but we don’t hedge our cash flows.” original investment but we don’t hedge our cash ﬂows.” Will they increase their allocations in real estate? Hutcheson’s short answer is yes, in a global context. “I think you increasingly see pension funds looking for yield or stability,” he says. “The bond markets are low, and the volatility in the capital markets is high.” Looking ahead, he says, some pension funds predict lower returns and new risks in the coming years. “The future is not for the faint of heart,” he says. “Fortunately we are backed by owners who have been long-term supporters of real estate as an asset class. And we have a portfolio with a combined assets under management over $35 billion today with a very stable basis, and great real estate in the markets in which we’ve chosen to invest.” ■ Michelle Morra-Carlisle
DISCIPLINE AND DIVERSIFICATION DELIVER DURING DIFFICULT TIMES Canada’s long-stable real estate market will likely stay that way, observed Sylvain Fortier, despite the country’s commodity crunch.
Sylvain Fortier Global Chief Investment Officer, Ivanhoé Cambridge
“Canada remains a good risk-return investment, if you want strong long-term cash ﬂow and low volatility,” reassured Ivanhoé Cambridge’s Global Chief Investment Ofﬁcer. Investors chasing higher returns faster appreciation of their assets may have to look abroad, though. When Ivanhoé Cambridge ﬁrst went global, nearly half its portfolio remained in Canada. Today, that ﬁgure has fallen to closer to a third, mostly because of investments outside Canada. Fortier acknowledged that returns will likely be lower during the next few years. He stressed the importance of a solid balance sheet.
Cash is king “Most people agree that capitalization rates won’t go much lower,” he observed. “That means that market appreciation won’t drive up returns the way it has until now. We won’t get the additional kick that we did during the past few years with another 25-point drop in the cap rate. So your returns will be driven ﬁrst and foremost by your cash ﬂow.” Ivanhoé Cambridge’s strategy for the lean years triangulates geography, asset class and risk versus return. “Canada counterbalances other markets,” Fortier explained. “It’s low-risk, low-return investment that earns cash steadily, year in and year out from solid, prosperous tenants.” We see opportunities in Europe, he predicted, where the economy is growing, Canadian Real Estate Forum / WINTER 2015
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GOOD SUSTAINABILITY PRACTICES LEAD TO HIGHER BUILDING VALUE “They compared buildings that had LEED certiﬁcation or other acknowledged sustainability credentials with others that did not,” says Gary Whitelaw, Chief Executive Ofﬁcer at Bentall Kennedy.
Gary Whitelaw Chief Executive Officer, Bentall Kennedy
“Our forecast going forward is that those factors will become even more pronounced, leading to a material improvement in income and valuation performance, and which will only grow over time.
A recent study of ofﬁce buildings managed by Bentall Kennedy determined a conclusive link between sustainability practices and higher occupancy, tenant satisfaction and retention rates, as well as lower inducements – all of which contribute to higher building value.
“We put a sustainability filter in all our acquisition and hold analysis and if we think a building is particularly challenged, we will either sell it or not attempt to acquire it.”
The peer-reviewed study was led by research teams from the University of Maastricht and the University of Guelph, examining 10 years of data on a 58 million sq. ft. portfolio held by Bentall Kennedy in the U.S. and Canada.
“If we have a B or C class building that is difﬁcult to move to a contemporary standard and that will lead to higher operating costs, lower rents and diminished demand, we see it as an element of obsolescence. We put a sustainability ﬁlter in all our acquisition and hold analysis and if we think a building is
particularly challenged, we will either sell it or not attempt to acquire it.” Recently, the Canadian market has been tricky to manoeuvre, says Whitelaw. “The Alberta ofﬁce market is struggling quite a bit from the dramatic contraction in demand, as well as the wave of new construction being delivered at precisely the wrong time “In spite of that, we’re seeing valuations and pricing for top quality assets in stable markets are holding up quite well; it’s all about the reliability of the income from those assets, and your ability to retain tenants, hold or even improve occupancy over time. We’re likely to see strong valuations continue even if the U.S. begins to raise interest rates. “Anything with strong continuing income will be sought after but I think there is a massive expectation gap for the more challenged assets, and therefore little trading activity in those markets.” These days, they’re very active in the considerably more robust U.S. market, particularly in cities experiencing growth in the knowledge industries such as Boston, Seattle, and Denver. “Those areas are hiring and creating demand and growing rental rates for commercial accommodation of all sorts,” says Whitelaw. ■ Barbara Balfour
“We won’t get the additional kick that we did during the past few years with another 25-point drop in the cap rate. So your returns will be driven first and foremost by your cash flow.” though he cautioned against seeing the continent as a monolith. “Europe is a tapestry of very different markets and political realities,” Fortier said. “Money and people are ﬂocking to London, which creates a dynamic combination. We have a strong logistics portfolio throughout Europe that’s doing very well.” The ﬁrm also has a big stake in the United States, mostly in major cities. “The fundamentals are very good on the revenue side,” he said. “We certainly Like New York, having www.realestateforums.com
made a massive commitment with Blackstone on half of Stuyvesant town, and we’ve done well in San Francisco buying very small assets, but a lot of them.” Further aﬁeld, Fortier foresees opportunity in Brazil’s current ﬁnancial challenges. His company has also taken an interest in Latin American prospects closer to home. “Mexico is probably the closest growth market that we have,” he enthused. While China remains the ﬁrm’s focus in Asia, Ivanhoé Cambridge is taking a fresh look at India. “We think that the political and economic situation there has improved,” Fortier said. “We might consider transactions there with the right partners.”
He underscored the company’s extreme discipline in formulating a clear business plan, then sticking to it. “We’re going to be a net buyer during the next few years, but it will be done through buying and selling,” Fortier explained. “We very much believe in crystallizing proﬁts when we can. By recycling some of the money out of certain assets or markets, we create our own liquidity.” “Once the business plan is achieved, we don’t want to be greedy and ﬁght for every last dollar,” he concluded. “We will leave some for the next owner and instead move on to the next project.”
■ Robert Frank 53
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SHALE OIL PRODUCERS DEFY SHAKEOUT
Appointment Notice The Canadian Urban story has developed over the past 44 years. Today, we begin the next chapter with the appointment of David Lopatka as President.
Helima Croft Managing Director and Chief Commodities Strategist, RBC Capital Markets
Plummeting oil prices have put unprecedented pressure on energy producers in Canada and around the world. The shale oil revolution has hammered energy prices, driving producer margins below the cost of capital. Clearly, something has to give. So far, American shale producers have deﬁed a shakeout that had, early this year, seemed inevitable. “Key OPEC producers expected a recovery and increased production,” recalled RBC Capital Markets Managing Director and Chief Commodities Strategist Helima Croft. “Saudi production is up almost a million barrels, year over year, as is Iraqi production.” “The Saudis tried letting the market set the ﬂoor – when they thought the ﬂoor was $75 a barrel,” she continued. “They were surprised by the resilience of U.S. production. If U.S. production ultimately proves unbreakable, then they really have a problem.” Iran could also add to the oil glut in 2016, if it moves swiftly to meet conditions and end longstanding sanctions. 54
Since 2002, David has been an active member in the realty advisory industry and has progressed with increasing responsibilities in executive roles. David is a CFA David Lopatka Charterholder and holds the AACI, President, Canadian Urban Limited P.App designation from the Appraisal Institute of Canada as well as the MRICS designation from the Royal Institution of Chartered Surveyors. David also holds a Bachelor of Education degree from the University of Alberta, and a Diploma of Urban and Land Economics from the University of British Columbia. Canadian Urban is a highly regarded nationally focused real estate investment advisor. Established in 1971, Canadian Urban has a track record of delivering consistent significant results for its institutional and high-net-worth investors.
The lower-for-longer phenomenon that has emerged is literally a life-or-death issue for some oil producing countries.
instability,” she said. “If they can’t cover wages and experience massive shortages, they could face food riots.”
“The wild card is whether régimes will remain stable in this environment,” Croft observed. “Cash enabled them to survive the Arab Spring. High expectations remain for social services and, if they can’t pay for them, they’re in real trouble.”
“With four ongoing wars, the Middle East has never looked more unstable. Normally you have one, plus the Arab-Israeli conﬂict in the background,” Croft added. “The question is what has to give, and what will give ﬁrst.”
“Countries like Iraq, Algeria, Libya, Nigeria and Venezuela will really struggle to meet their financial obligations at current prices, putting them at risk of political instability.”
Some Saudi royal family dissenters want OPEC to slash production, a new political wildcard. A two billion barrels a day cut could push crude into the mid-$70 per barrel range, boosting oil revenue by more than $30 million a day.
Countries like Iraq, Algeria, Libya, Nigeria and Venezuela are at particular risk of political instability.
“We still have to work off very high inventories before the market reaches a balance in the second half of 2016, once they start to drop,” Croft forecast.
“Some of those countries will really struggle to meet their ﬁnancial obligations at current prices, putting them at risk of political
For now, that scenario is only an incremental risk, so don’t expect signiﬁcant price rises anytime soon.
■ Robert Frank Canadian Real Estate Forum / WINTER 2015
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Bringing real estate investment advice to life.
Whether your group is entering into real estate for the first time or developing your existing portfolio, Canadian Urban delivers the experience and track record to bring your real estate investment objectives to life. From nationally diverse, core pooled funds to opportunistic turn arounds, our team provides a passionate perspective to all that we do. Consistently ranked in the first quartile our greatest satisfaction comes from helping our clients achieve their objectives. Whether your group is considering adding to your real estate portfolio or entering the market for the first time call us at: Toronto: (416) 367.1300 Edmonton: (780) 424.7722 Toll Free: 1.877.612.7722
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tomorrow. We think that, for the time [being], you will see it struggling and the secondary reaction to oil prices that will be more visible in … unemployment numbers.” Alberta and its energy sector is being hit, but there are some bright lights. For example, Tal says, “Ontario, by now, has seen some improvement in manufacturing, but it’s going to take longer. One of the reasons is because we lost signiﬁcant capacity in manufacturing and it takes a long time to rebuild. And the capacity that we are building is a totally different kind which will be more capital-intensive, as opposed to labour-intensive. Manufacturing is changing in a very big way.”
WILD CARDS STILL LOOM OVER THE CANADIAN ECONOMY Optimism remains elusive with the current state of Canada’s economy, says Benjamin Tal, Deputy Chief Economist for CIBC.
Benjamin Tal Deputy Chief Economist, CIBC
And, with drooping oil prices and rising unemployment, Canada will likely have to weather through more challenging times before things starts to get better. “I think, overall, there’s no reason to be too optimistic about the Canadian economy,” says Tal. “We’re seeing the energy sector still struggling, and that will not end
A Tale of Two Markets – Weighted Average Price y/y % change, 3 - mo moving avg • Source: © CREA, CIBC
Vancouver and Toronto are still hot spots for the housing market in Canada as other locations, Tal says, “are in the process of soft landing, and I do believe that Vancouver and Toronto are overshooting.
“The only issue is what would be the correction mechanism, how it will correct. This will be in a big way a function of how interest rates start rising and how quickly.” “The only issue is what would be the correction mechanism, how it will correct. This will be in a big way a function of how interest rates start rising and how quickly. A signiﬁcant increase in interest rates or any other economic shock like a recession will really test those two cities, and I see not a big decline in prices. ” “[Another] scenario,” Tal adds, “is that rates would be rising very, very slowly and, if that’s the case, we will be tested; maybe in some pockets, prices will go down, but we’re not going to see a cliff.”
12 10 8
All CMAs Less Toronto, Calgary and Vancouver
When asked about a forecast for the bond market, Tal says the U.S. Fed is talking about possibly raising interest rates as early as December. “Clearly, when they start raising interest rates, you’ll see … yields starting to rise more in the U.S., less in Canada, because the Bank of Canada is not going to touch interest rates until [at least] 2017,” he says.
Toronto and Vancouver
■ Alex Frazer-Harrison
6 4 2 0 11
Consumers, Tal says, are “probably not going to be a very strong contributor to the overall economic growth, because [they’re] sitting on a considerable amount of debt, and in many pockets of the economy, the housing market is stabilizing.”
Canadian Real Estate Forum / WINTER 2015
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www.cibccm.com www.cibccm.com 1 Based on a 100% interest. CIBC World Markets Inc. is a legal entity name. CIBC Capital Markets is a trademark brand name under which different legal entities provide different services under this umbrella brand. Products and/or services offered through CIBC Capital Markets include products and/or services offered by the Canadian Imperial Bank of Commerce, the parent bank of CIBC World Markets Inc. and various other subsidiaries of the Canadian Imperial Bank of Commerce. CIBC World Markets Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. CIBC World Markets Corp. is a member of the Financial Industry Regulatory Authority. CIBC Capital Markets and the CIBC Cube Design are trademarks of CIBC, used under license by CIBC World Markets Inc. CIBC Cube Design is a trademark of CIBC.
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INSIGHTS ON WHAT LIES AHEAD
John Sullivan President and CEO, Cadillac Fairview Corporation Ltd.
What is more attractive for real estate investors today; yield or momentum? John Sullivan, President and CEO of Cadillac Fairview Corporation Ltd. believes that from an asset perspective,
THE GLOBAL VIEW: INVESTORS PLAY IT SAFE
Warren Jestin Senior Vice President & Chief Economist, Scotiabank.
Economic performance globally, today, can be described as uneven. China is slowing down; Russia and Brazil remaining very weak; and growth in emerging markets is practically at a standstill compared to their strong growth in the past. Performance in Europe is at best 1.5 per cent, with considerable risk. As a result, global investors are focusing on the United States. 58
investors are chasing what they think is a fair return relative to other investing alternatives. He gives the example of ten-year treasuries, which provide healthy spreads even in this historically low cap rate environment. From a commercial real estate standpoint he sees signiﬁcant capital being deployed into development because of generally superior returns relative to acquisitions - that said, those margins are getting thinner. “I would say that smart money is selling assets in this relatively high-priced environment to build a cash stockpile for future opportunities and to realize returns,” he says. Of all the offerings on today’s market, he believes that the most signiﬁcant for public companies is the opportunity to buy their stock back, given that most are trading at a large discount to NAV. Looking to the coming year, Sullivan expects that Canadian pension funds and a few large companies will increase their global presence because they are looking to diversify both geographically and by asset type. “2016 is a year to be opportunistic,” he says. “There will still be development opportunities in
“The U.S. has become that bright shiny star that global investors believe has, from a geopolitical point of view, safety, security, liquidity, and also a growth story that is likely to last not only through 2016 but beyond,” says Warren Jestin, Senior Vice President & Chief Economist for Scotiabank. In terms of real estate he believes short term interest rates rising in the U.S. will likely push up longer term interest rates as well, but he doubts they will rise much more than half a percentage point. Today’s weak Canadian dollar is under three inﬂuences: the strong U.S. dollar, Bank of Canada’s tendency to lag behind the U.S., and the international commodities market. “Our best guess on commodities is that with the emerging markets uneven, growth in Europe very lethargic and the U.S. doing well but still not growing at a rapid rate, the commodity prices remain soft,” Jestin says. Canada’s most important commodity is oil, which could go up toward $55-$60 by the end of next year, “but that hinges on a lot of things [in Saudi Arabia, Iran and Iraq] that may not actually come to fruition. I think the key message on oil is that the conversation has changed. It’s not $100 or $80 oil anymore.” In terms of global capital markets, he says the focus will remain on the U.S. because
“Smart money is selling assets in this relatively high-priced environment to build a cash stockpile for future opportunities and to realize returns.” 2016, but they are fewer and the margins are thinning.” He says investors will have more development opportunities in the U.S. than in Canada on a relative basis, since the U.S. has not been developing properties as aggressively as Canada over the past few years. Whether or not real estate will continue to beneﬁt from a ﬂight to yield, he suggests, will depend on where investors believe the interest rates are headed and what direction the economy is heading in. “In Canada I think there will be slow growth and in the U.S. there will be medium growth,” Sullivan says. “So my guess is there will continue to be a strong demand for real estate.” ■ Michelle Morra-Carlisle
“The U.S. has become that bright shiny star that global investors believe has, from a geopolitical point of view, safety, security, liquidity, and also a growth story that is likely to last not only through 2016 but beyond.”
the emerging markets are seen as risky. As U.S. interest rates begin to rise, debt heavy countries will have a hard time attracting new capital. The situation isn’t helped by incidents like the recent terror attacks in Paris, which make investors leery of putting money to work longer term. They’re favouring safety, security and liquidity,” Jestin stresses. “We think longer term the market in Europe still has great opportunities and that the emerging markets will be the markets of the future in terms of overall growth. But that’s a story that I think lies beyond 2017.” ■ Michelle Morra-Carlisle Canadian Real Estate Forum / WINTER 2015
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Forecasting next seasonâ€™s biggest trends What are the best bets for investment and development in 2016? 7KHUHDOHVWDWHLQGXVWU\Ĺ‚VLQÄ XHQWLDOOHDGHUVSUHGLFWWKHELJJHVWWUHQGVLQ 3Z&Ĺ‚VDQQXDOIRUHFDVWUHSRUW Emerging Trends in Real Estate 2016. To get your copy, visit: www.pwc.com/ca/emergingtrends For more information: Frank Magliocco National Real Estate Leader 416 228 4228 firstname.lastname@example.org ÂŠ 2015 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. 4907-05-1015
DIVERSIFICATION, INVESTING IN APARTMENTS: TWO KEYS TO REAL ESTATE MARKET SUCCESS â€œBut Iâ€™ve seen tenants wanting to give back space take it back six months later and needing to expand. The market can turn quickly both positively and negatively, and you have to be looking at it for the long term.
Paul Finkbeiner President, GWL Realty Advisors
â€œThe biggest opportunity right now lies in building or buying apartments- it still seems to be one of the best asset classes out there. Weâ€™ve been in it since 1995. and have accumulated many apartments for our clients.â€?
As the saying goes, if you want to make a lot of money, donâ€™t diversify; but if you want to keep a lot of money, diversify.
While most assets are linked to the business cycle, apartments are linked to the demographic cycle. â€œSome of the factors we considered in our decision to get into the asset class is we have two demands from millennials and empty nesters,â€? says Finkbeiner.
For GWL Realty Advisors, which manages $17 billion in assets including ofďŹ ce, industrial and retail asset classes, diversiďŹ cation helped offset losses in the Alberta real estate market.
â€œThe affordability of housing seems to be out of reach for many people, but having enough rentals gives people an option and allows baby boomers to not have all their money tied up in a condo.â€?
â€œWeâ€™re at the 25 per cent mark in Alberta; meanwhile, our remaining 75 per cent is dong very well so the two offset each other,â€? says President Paul Finkbeiner.
The strongest market for apartments is by far in Toronto. â€œBetween 60 and 70 per cent of all apartments in Canada are in Toronto you see that when you ďŹ‚y in and look at the city from an airplane, at all the buildings
focused around subways. That will continue and weâ€™ll see more densiďŹ cation around suburban nodes,â€? says Finkbeiner. â€œThe city will become more transit-orientated, and the Liberal government spending more money on infrastructure and transportation will support even more rental departments and developments. We will see further densiďŹ cation of Canadian cities.â€? In terms of their investment strategy outside of Canada, they are pursuing the idea of purchasing a U.S. advisor and to expand their offerings on their U.K. platform. "We're looking to do more work to globally expand our capabilities in those markets, but we'll do so thoughtfully and carefully," says Finkbeiner. "We believe in local market knowledge and in terms of growing the business, if you're in the U.S. you should have U.S. employees. We're interested in major U.S. markets and particularly focused on the mid-West, as we think the people there are more closely culturally related to Canadians." â– Barbara Balfour Canadian Real Estate Forum / WINTER 2015
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LEED PLATINUM: A HIGHER STANDARD Toronto-Dominion Centre continues to lead the way in innovation and sustainability with the exceptional achievement of a complex-wide, six-building LEED:EB O&M Platinum certiﬁcation. It’s how TD Centre is making business better. tdcentre.com
DEVELOPMENT MOMENTUM CYCLE
David Gerofsky Chief Executive Officer, First Gulf Corporation
Wide-open planning enabled the market-led residential development that attracted a young educated workforce downtown. They in turn drove commercial and ofﬁce development to begin the cycle again. www.realestateforums.com
When Barbara Hall was mayor of Toronto from 1994 until 1997, she set up the “Two Kings” experiment by removing all the old zoning regulations from the sectors next to King Street East and King Street West. That experiment helped turn the city into “one of the most important centres in North America” says David Gerofsky, Chief Executive Ofﬁcer of First Gulf Corporation. First Gulf has multiple residential, commercial, industrial and retail projects completed and underway throughout the city. Some of the best known include Charlie on King Street, east of Spadina Ave, Monde on the waterfront, One Bloor at Yonge and Eglinton, Pace at Dundas St. and Jarvis, X2 at Jarvis and Charles; and Tux at King St. W. and Blue Jays Way.
interesting phenomenon and shows how planning leads to residential, commercial and ofﬁce development. We’re seeing adaptive reuse of former industrial buildings into ofﬁce and commercial buildings. There are plenty of examples of those. Coca Cola is now in a building that used to be a printing operation and it’s now a modern 21st century ofﬁce space.” According to Gerofsky, step three in the cycle are the restaurants, movies and other retail stores that sell products the young people living in a neighbourhood want to buy. “Then the human resources of major companies like Google, Amazon are setting up their ofﬁces in the downtown core to be close to their workforce, many of whom don’t have a car.”
“Hall created wide open zones for King East and King West,” said Gerofsky. “They wanted to let the market decide how these areas would be developed. That opening up of the planning regime led to a renaissance in these areas.”
To keep the cycle continuously generating, good transportation options have to be set up, including public transit innovations, such as the SmartTrack or the electriﬁcation of the GO system.
Gerofsky said that Hall’s experiment led to thousands of units of residential innovation that attracted young educated people who wanted to live in the centre of the city.
Gerofsky says that the cycle is dependent on factors in the Canadian and world economies but he’s very optimistic that the future is bright for Toronto for the foreseeable future.
“This has happened elsewhere too,” he said, describing the cycle that set up. “It’s an
■ Tracey Arial 61
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Harbour Equity capital corp.
Fedex Ground Distribution & Sorting Center Development â€“ Vaughan, Ontario
E-COMMERCE TRANSFORMS INDUSTRIAL REAL ESTATE
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Kevan Gorrie President & CEO, Pure Industrial REIT
As industries evolve, so do industrial facilities. What is it about these properties that appeals to investors today? According to Kevan Gorrie, President & CEO of Pure Industrial REIT, the asset class lends itself very well to the REIT model and to pension funds. â€œItâ€™s very stable income,â€? he says. â€œYou can acquire it, you can build it, and you can build it effectively.â€? Another attractive feature of industrial facilities, he says, is their â€œhuge liquidity.â€? In industrial real estate, selling to the tenant is a very common liquidity event for owners. Attracting a lot of institutional money, the industrial market has been â€œsteady to good,â€? and even remains so in Alberta despite a slide in oil prices. Toronto and Vancouver continue to rank among Canadaâ€™s top industrial real estate markets. Tenants of industrial facilities now have different needs than 20 years ago. In particular, they want e-commerce facilities. Gorrie says that means high clear height, low site coverage, Canadian Real Estate Forum / WINTER 2015
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Creative Commercial Real Estate Lending Solutions Across Canada $600M in mortgages under management 2ELIABLE &UNDING s 3OLUTIONS $RIVEN with lots of land for vehicle parking and access. Another shift is that e-commerce facilities tend to be located closer to the centre of the population than conventional warehouse or distribution facilities. Pure Industrial REIT is currently building Canada’s largest e-commerce building in Vaughan, Ontario, a 422,000 sq. ft. facility that will be the Canadian hub for FedEx. “It’s very well located at Highway 27 and Rexford Road – right in the middle of houses, retail, and other industrial,” Gorrie says. One common problem with low clear height buildings: many are huge. Gorrie feels that nowadays, if a building has a low clear height (such as 18 foot ceilings) it will be more useful if it’s small and well located. “An 18-foot clear height building, if it’s 100,000 to 200,000 sq. ft., is really obsolete and harder to rent,” he says.
“What I do think you’ll see is obsolete manufacturing facilities being converted to transportation and logistics facilities for the purpose of e-commerce. That’s exciting.” Can those lower roofs be raised? Gorrie hasn’t seen that happen yet because so far there is enough modern, functional product – close to where people live and work – to meet the demand. “What I do think you’ll see is obsolete manufacturing facilities being converted to transportation and logistics facilities for the purpose of e-commerce,” he says. “That’s exciting. Instead of the location being a commodity to our industry, location begins to matter now.”
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WINTER 2015 / ISSUE 70
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t Market awareness through curated exhibits Registration will open in January 2016. Visit gpmevent.com for up-to-date information. Interested in speaking, sponsoring, exhibiting or attending, email email@example.com. Powered by
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PROPERTY TRANSACTIONS BY ASSET CLASS GREATER TORONTO AREA (GTA)
Q3 2015 vs. Q2 2015 vs. Q1 2015 Land
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PROPERTY TRANSACTIONS BY ASSET CLASS GREATER CALGARY AREA (GCA)
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PROPERTY TRANSACTIONS BY ASSET CLASS GREATER VANCOUVER AREA (GVA)
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SIGNIFICANT TRANSACTIONS YTD* MARKETS INCLUDE THE GTA, GGH, GCA, GEA & GVA Market
* Jan 1 , 2015 to Nov 12 , 2015
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The Trusted Source for Property Market Information in Canada
Do you really know what the convergence of the Commercial Investment and Residential Development property markets means for your business? &KDQJHVFDXVHGE\LQWHQVLÄ†FDWLRQSROLFLHVIRU5HVLGHQWLDO'HYHORSPHQWDUHFUHDWLQJrisks and opportunitiesIRUDOO&RPPHUFLDO SURSHUW\PDUNHWSDUWLFLSDQWV 'R\RXXQGHUVWDQGWKHVHPDUNHWG\QDPLFV"$UH\RXÄ†QGLQJDQGPD[LPL]LQJWKHRSSRUWXQLWLHVLQ\RXURZQSURSHUWLHVDQGSRUWIROLR" $UH\RXUHDOO\FRQÄ†GHQWDERXW\RXU
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For tailored solutions to your business needs, contact Client Services at firstname.lastname@example.org | www.realnet.ca 8VHVXEMHFWWROLFHQVHDJUHHPHQW7KLVSXEOLFDWLRQRUDQ\SDUWWKHUHRIPD\QRWEHUHSURGXFHGRUWUDQVPLWWHGLQDQ\IRUPE\DQ\PHDQVZLWKRXWWKHH[SUHVVZULWWHQSHUPLVVLRQRI$OWXV*URXSLQHDFKVSHFLÄ†FLQVWDQFH7KHPDWHULDOLQWKLVGRFXPHQWKDVEHHQSUHSDUHGE\$OWXV*URXS EDVHGRQLWVGDWDDQGH[SHULHQFH7KHLQIRUPDWLRQLVEHOLHYHGWREHDFFXUDWHDWWKHWLPHRILWVSUHSDUDWLRQKRZHYHUQRUHVSRQVLELOLW\FDQEHWDNHQIRUHUURUVRURPLVVLRQV$Q\DGYLFHFRQWDLQHGKHUHLQLVRIDJHQHUDOQDWXUHDQGVKRXOGQRWEHUHOLHGXSRQXQOHVVFRQÄ†UPHGZLWK Altus Group. Altus Group makes no representation about the accuracy, completeness or suitability of the material represented herein for the particular purpose of any reader. Please contact email@example.com with any questions.
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NOT YOUR FATHER’S COMMERCIAL REAL ESTATE INDUSTRY: 6 WAYS THE INDUSTRY HAS CHANGED
Michael Brooks Chief Executive Officer, REALpac Most ﬁnance and investment textbooks in the market are timeless (after all, math is math), but many have not caught or highlighted changes in the commercial marketplace over the last 20 years. The following are 6 key aspects to the new business of commercial real estate in Canada circa 2015. 1. Recognized Asset Class: Real estate is now a recognized asset class for pension fund investments. Indeed, in the Canadian market, commercial real estate may represent between 5 and 20 percent of the assets of many of those pension funds. In 2015, it was announced by MSCI and the S&P/Dow Jones Index Series that the global industrial classiﬁcation system (“GICS”) will separate real estate from ﬁnance1 in classifying stocks as at August 31st, 2016. However, that change merely reﬂects the obvious: Real estate is now its own asset class and has been since the 1980’s in the minds of institutional investors. 2. Deep Research and Academic Study: We have much more research now on commercial real estate, both directly held and through real estate securities, as a component in a modern portfolio of assets, and particularly, the co-variance between and among those assets. Given this data, global investors are now able to construct a mix of assets that may be diversiﬁed geographically, by real estate asset class, and by 72
type of tenant or risk, whether directly held or through private equity, a real estate investment trust (“REIT”), or shares of a real estate operating company. From this mix, investors are able to deﬁne for themselves the best risk adjusted return from time to time. The real estate industry is getting smarter and developing a deeper understanding of itself as an investment vehicle. 3. Deeper Property Market Data Coverage: Service providers are becoming more and more sophisticated, giving the market access to better data and analysis than we had 20 years ago. The data provided by entities such as IPD (an MSCI company), Co-Star, RealNet and Altus, and data provided by the many commercial brokerage operations operating globally and regionally in Canada (such as Jones Lang LaSalle, Avison Young, Cushman & Wakeﬁeld, CBRE and Colliers) means that at least for major metropolitan markets in Canada and the US, more data and analytics are available around pricing and value in almost all real estate asset classes. 4. Deeper Public Market Analyst Coverage: Given the number of REITs and real estate operating companies (“REOCs”) listed on the Toronto Stock Exchange and the Toronto Venture Exchange, the number of investment analysts covering the real estate industry and analyzing both those securities and the quality of the underlying assets has also led to the greater sophistication of the industry.2 Many of those analysts have focused on risk and have become adept at determining the growth prospects for these entities. Even before Canada’s adoption of the International Financial Reporting Standards (IFRS) they were able to apply market cap rates to reported cash ﬂows and estimate net asset values over entire portfolios. These analysts have advanced the quality of the debate and level of understanding of real estate in Canada, and have pressured public company and REIT management to improve. 5. Segmentation of Roles and Gender Rebalancing: There is a transformation happening in the management of real estate and we have much more segmentation in
roles and responsibilities. An asset manager in real estate is now a deﬁned position and career path, differentiated from a property manager or from a portfolio manager, depending on the investing entity. As the REALpac/FPL 2015 Canadian Real Estate Compensation Survey3 shows, the breadth of career possibilities in commercial real estate is huge, with over 160 listed positions. The number of women in the industry continues to grow, both as evidenced by the strength of TCREW membership and anecdotally, by meeting the daughters of real estate old timers now following into the family business (my daughter included). 6. Sustainability at the Asset and Entity Level: There is a new context for real estate around sustainability. This isn’t just business-as-usual progress on reducing energy costs (although that is part of it). Rather, it is the recognition of the impact commercial real estate has on natural resource depletion, waste generation, water and energy consumption, and greenhouse gas production that has changed. Commercial buildings in Canada account for approximately 1/3 of all electricity consumption and, directly and indirectly, approximately 1/3 of all greenhouse gas emissions in Canada. Many countries and cities4 are now mandating disclosure of energy consumption for medium and larger buildings and some are mandating disclosure of water consumption as well. Coupled with this, many institutional grade tenants insist on locating in green and sustainable buildings, putting pressure on the landlord community to upgrade those buildings in accordance with some deﬁned standard. ■ The preceeding was a condensed excerpt from the new textbook “Canadian Commercial Real Estate: Theory, Practise, Strategy”, written and edited by Michael Brooks, Ph.D, to be published spring 2016. 1. The combined class was composed of finance, insurance and real estate, or “fire” for short. 2. Almost all the major Canadian banks have stock analysts covering public real estate companies and REITs including RBC, TD, Scotiabank, BMO, National Bank, Desjardins, CIBC, plus independants such as Raymond James and Cannacord Genuity. 3. Real Property Association of Canada: this is an annual survey. 4. As of spring 2015, both the City of Toronto and the City of Vancouver are considering mandatory reporting and disclosure as is the Province of Ontario and Province of British Columbia.
Canadian Real Estate Forum / WINTER 2015
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LATEST ISSUES IN SUSTAINABILITY
Julia St. Michael Director, Research & Sustainability, REALpac
The latest trends in sustainability and green buildings can be found in a jumble of letters – GRESB, WELL, ERB… and join others already included in the alphabet soup. The buzz about these new or growing policies and standards is centred around the fact that parties/ideas traditionally on the fringes of the conversation (tenants’ health, investor requirements) are being brought right into the center of the sustainability spotlight. From an investor perspective, we are continuing to see increased interest in the Global Real Estate Sustainability Benchmark (“GRESB”) and an increase in participation around the world as well as here in Canada. As GRESB assesses the sustainability performance of real estate portfolios, it brings more attention to the link between 74
disclosure of material non-ﬁnancial information and the growing value proposition underpinning sustainability in real estate. Simply put, companies that manage and disclose environmental, social, and governance data about their organizations and operations are seen to run better businesses generally – and better businesses produce better ﬁnancial results over the long run. Participating Canadian companies outperformed their North American counterparts in 2015 and boasted a collective average score of 67 compared to the global average of 56 and North American average of 54. Likewise, Canadian respondents surpassed the global and North American averages in all seven measured performance categories including management, policies and disclosure, risk/opportunity evaluations, environmental monitoring, performance indicator tracking, building certiﬁcations, and stakeholder engagement. This is a formidable feat – and a bar set high for future participants and performance goals. On the tenant side, New York-based Delos is working hard to transform homes, ofﬁces, schools and other indoor environments into places that contribute actively to our happiness, health, and well-being. With the introduction of the WELL Building Standard, more rigour and measurement is now being focused on the health of the occupants inside buildings, rather than the efﬁcient operation of buildings. The standard sets performance requirements in seven categories relevant to occupant health – Air,
Water, Nourishment, Light, Fitness, Comfort, and Mind – aspects that are grounded in medical and scientiﬁc research. We are eager to track how “well” WELL will support landlords and tenants in achieving increased savings and productivity and rumors have it that results of early Canadian pilot projects may be released next year. At the local municipal and provincial level, there are many discussions happening across the country about Energy Reporting and Benchmarking (ERB) policies related to large commercial buildings. These policies would require commercial building to report annual energy and water use to an administering body who would then analyze and report aggregated ﬁndings as well as potentially disclosing building metrics to the public. ERB policies are designed to ﬁt within city or province climate change plans as an active efﬁciency measure, complementing other initiatives such as cap-and-trade programs and transportation initiatives. REALpac is anticipating an announcement from the Province of Ontario and will be actively engaging our members and supporting the roll-out of any proposed programing in 2016. Overall, 2015 has been an active and exciting year for new initiatives in sustainable and green buildings and REALpac anticipates continued growth in interest from tenants, investors, government and others not normally around the table but who are now ﬁnding their place in the sustainability spotlight. ■ Canadian Real Estate Forum / WINTER 2015
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REALPAC & IPD: THREE INDUSTRY PERFORMANCE TRACKING INDEXES James Harkness Vice President – Client Coverage, MSCI Real Estate
After an exceptional period ending in 2014, where the index reported a 10 year annualized return of 11 percent, the results to date in 2015 indicate a slowing direct real estate market. As the chart indicates, the return of 6.8% for the 12 months return to the end of the second quarter of 2015 reﬂects the impact of lower capital growth across the entire country. REALpac and MSCI look forward to publishing the 2015 results on February 4th, 2016. The MSCI real estate team has focused on streamlining the delivery date so that clients can ﬁnalize their yearend performance measurement reports as quickly 76
Annualized Standing Investments • Source: © MSCI CAPITAL GROWTH INCOME RETURN TOTAL RETURN 10-YEAR ANNUALIZED TOTAL RETURN
% pa 25
9.3 8.4 8.8
As of the second quarter of 2015, the index reports the investment return on over 2,400 buildings with a capital value of CAD 128 billion. The index tracks performance across all regions, census metropolitan areas and types of buildings.
Total Return History for Canada
In real estate, the importance of having dependable information cannot be understated. REALpac and MSCI Real Estate have worked together for the past 5 years to produce the REALpac/IPD Canada Quarterly Property Index. This index is widely used by the industry to measure the performance of the directly owned real estate market in Canada.
as possible. REALpac and MSCI welcome the industry to participate in our complimentary results presentations held in Toronto on the morning of February 4th and in Vancouver on the morning of February 5th, 2016. To register, please visit realpac.ca > Events > Upcoming Events.
Of course, the REALpac/IPD Canada Quarterly Green Index is also proving very useful to owners of buildings that have been certiﬁed by widely accepted standards to ensure that the investments in green construction and technologies contribute to improved investment performance.
The newest index to be published to the market is the REALpac/IPD Canada Quarterly Property Fund Index. The index tracks the performance of eight open ended core real estate funds. The unique aspect of the Fund index is that it will also track the impact of portfolio leverage and cash. This index will be a great tool for investors in real estate funds. MSCI will publish the fund index results on the same date as the property index starting in the fourth quarter of 2015.
As an increasing number of investors ﬁne tune their performance measurement analysis and align their benchmarks to an appropriate index, the use of custom indexes is a logical step forward. The result is that MSCI is creating options for investors to account for the types of assets that are being measured and the state of the Canadian market. In some cases, this results in a certain sector like residential or a certain region being carved out of the benchmark data. ■ Canadian Real Estate Forum / WINTER 2015
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2015 COMMERCIALTO-RESIDENTIAL TAX RATIOS
Brooks Barnett Manager, Government Relations and Policy, REALpac
As Canada’s municipalities look for ways to boost funding and revenue sources to ﬁnance capital expenditures, build vitally needed infrastructure and, in a minority of cases, to pay down ballooning debt loads, they will inevitably consider property taxes as a potentially useful policy tool. Property taxes inﬂuence A tenant’s choice of location. They are also directly linked to the competitiveness of the commercial real estate industry. High commercial property taxes can send jobs and development out of city centres, penalize investment in downtown ofﬁce, hotel, apartment and retail (particularly during periods of high vacancy), and punish small and medium sized businesses who are tenants in downtown ofﬁce buildings, by potentially driving them to the suburbs. REALpac actively monitors the tax rates and commercial-toresidential ratios in all of Canada’s major cities. REALpac’s 2015 Property Tax Rate Analysis reveals several key developments in the overall property tax standings. The corresponding graph shows the relative commercial property taxes per $1000 of assessment. Honorable mention: most of Canada’s major western cities are lowest among all surveyed. The average commercial-toresidential tax ratio for all municipalities surveyed was 2.86 to 1. Cities should continue to 78
Trend in Commercial Property Taxes per $1,000 of Assessment Source: © REALpac
Figures in this chart are calculated by multiplying the commercial tax rate by 1000 to give the taxes paid per $1,000 of assessment. Where Mill Rates are applicable, the Mill Rate is multiplied by the Mill Rate factor before calculating the ratio.
work to achieve a ratio as close to 2.5:1 or 2:1 as possible. This will ensure a competitive property tax regime and cultivate productive local commercial property markets. Vancouver, Toronto and Montreal continue to post the highest commercial-to-residential ratios of the ten cities in the report at 4.33, 4.01 and 3.67 to 1 respectively. On the lowest end of the spectrum, Saskatoon, Winnipeg, and Regina posted commercial-to-residential tax ratios of 1.99, 2.06 and 2.23 respectively. For the third year in a row, the highest estimated commercial taxes per $1,000 of assessment are maintained by Montreal, Halifax and Ottawa. Conversely, Calgary, Vancouver and Saskatoon had the lowest commercial rates for the third consecutive year. These municipalities should be commended for the positive progress made on reducing commercial tax rates over the past few years.
In Canada’s largest market, Toronto, the commercial-to-residential ratio continues its downward trend for the eleventh consecutive year. While this is generally positive for the industry, the overall ﬁnancial burden on commercial real estate remains high. Meaningful progress has been made with respect to the municipal property taxes rates of Canada’s major cities. The continued reduction of excessive property tax burdens on commercial and industrial properties should make cities more competitive, promote job growth and investment, result in increases to the property assessment base and subsequently generate more stable and sustainable revenue. To purchase the results of the REALpac 2015 Property Tax Rate Analysis, go to realpac.ca > Research > Property Tax Rate Analysis Reports. ■
Canadian Real Estate Forum / WINTER 2015
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STATE OF THE MARKET 2015
discussing the overall tax burden in the GTA, and its effect in driving up land prices. No one is talking about diverting demand, or increasing supply, or reducing red tape, or the development approvals timelines. The processes are drastically in need of reform. Michael Brooks Chief Executive Officer, REALpac
It’s hard for investors and managers of real estate entities not to feel a little bit under siege in Canada in 2015. Indeed the need for real estate organizations to keep learning, and to keep speaking out, has never been greater. REALpac is deeply involved in a multitude of public policy matters for its members. Here are some current highlights. The taxation of real estate continues to be an issue nationally, from increased development charges, to high property tax rates on commercial and multi-residential in Vancouver, Toronto and Montreal, to efforts by the city of Toronto to eliminate the Vacant Unit Rebate Program, to efforts by the Province of Ontario to allow all municipalities to extend further Municipal Land Transfer Taxes, to onerous parkland cash in lieu and parking cash in lieu regimes. Seemingly lost in this, is a comprehensive look through the ﬁlters of fairness, transparency, consistency, and economic efﬁciency of the totality of these taxes. We have extraordinarily high land prices in the Greater Toronto Area and the greater Vancouver Regional District. Governments are not responding in a coherent way to these problems. No one is 80
Urban Planning seems to have lost its way. While planners sing the praises of the walkable city and a transit oriented development, the standing taxation and zoning policy approaches say the opposite. Commuters who need their automobiles or who don’t live and work on a spoke and in a hub respectively seem disenfranchised, old school, and ignored. Why is Smart Track panned, when it seeks to join existing employment centres today, and should have the highest Day 1 net operating income of any alternative? The emergence of demanded Community Amenity Contributions in Vancouver, for example, suggests that under-zoning land pays off for a municipality. In Toronto, the situation is even more questionable. Lost is the needed ofﬁcial plan vision of where cities need to grow: now it’s a shadow game with land value capture on the agenda, and developers forced to ﬁght locally then at the Ontario Municipal Board (“OMB”). The very question of the OMB’s existence is on the City of Toronto’s and Province’s agenda. As of right zoning consistent with a realistic ofﬁcial plan that reﬂects a desired intensiﬁcation around transit nodes and in city centres is mostly missing. In the City of Toronto, the “avenues” which anticipate midrise development, aren’t up zoned in advance: developers are left to ﬁght their own battles with neighborhood groups, then council, then at the OMB. Employment lands permit a one employee warehouse but don’t want a 40 employee Costco. Typically, planners and ward councillors are years behind the real economy, and therefore their decisions are often uninformed, and a drag. Its developers and investors who are at the bleeding edge – people who are talking to and listening to
tenants and buyers today – who know where the local economy is going and why. In real estate capital markets, we have efforts by the Canadian Coalition for Good Governance to reform REIT Declarations of Trust modelled on the Canada Business Corporations Act, continued proxy demands from Institutional Shareholder Services for governance changes at the real estate operating company and real estate investment trust level, and the emergence of crowdfunding on the fringes as an interesting new development. Operating a real estate company continues to require more sophistication, not only in HR and IT, but also in managing continually rising energy and water prices, tenant engagement, investor and civil society demands for greater transparency and disclosure around energy consumption and carbon emissions, as well as greater transparency and disclosure around the company’s social contract, as may be reﬂected in a Corporate Social Responsibility report, and more recently the global real estate sustainability benchmark (“GRESB”) rating system. The recent change of title of the federal Ministry of the Environment to the Ministry the Environment and Climate Change, and the Province of Ontario’s entry into the Western Climate Initiative’s cap and trade program signals new policy directions, potential new regulation and perhaps new taxation around carbon footprints, and very likely new infrastructure initiatives to move more towards electricity and renewables. A national clean energy summit and emergent policy cannot be far behind. For all these issues, REALpac is involved. That’s the point of a member based association with deep research and policy stafﬁng – to speak for the leaders of the industry responsibly, thoughtfully, and professionally. With 90 or so of the leading Canadian real estate entities as members, we continue to focus on what is coming, what is wrong, and what is right. ■ Canadian Real Estate Forum / WINTER 2015
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FUND MANAGEMENT: TIME TO PLAY CATCH UP
modules relating to corporate governance, reporting, property valuation, INREV NAV, fee and expense metrics, liquidity and INREV data delivery. An eighth module on INREV Performance Measurement was released in a whitepaper for comment in March 2015.
Sandra Dos Santos Director, Industry Affairs & Compliance, REALpac
Canada is lagging behind its international counterparts in the area of best practice and reporting standards in the non-listed fund world. While the U.S., Europe and the Asia Paciﬁc region have developed best practice frameworks, Canada has yet to implement consistent industry standards. For the Canadian market, the time to play catch up is now. Industry organizations such as INREV, AREF, APREA and a joint effort by NCREIF and PREA have developed best practice guidelines and reporting standards for their speciﬁc jurisdictions. INREV’s comprehensive Guidelines for non-listed vehicles are becoming highly regarded globally. The Guidelines are organized into 7
AREF’s Code of Practice provides for two levels of compliance – minimum compliance and best practice – in respect of the governance of a fund, the operation of a fund, unit dealing and performance of a fund. APREA’s Best Practices Handbook creates a benchmark for organizations to achieve recognizing that legal, regulatory or cost restrictions may not always make it possible to do so. Best practice guidelines are set out regarding market disclosure, accounting and ﬁnancial reporting, valuation, portfolio performance and reporting, and corporate governance. The NCREIF/PREA Reporting Standards provide both required elements and best practice recommendations with regard to portfolio management, performance and risk, asset management, ﬁnancial and valuation. The focus around the world on best practices was the impetus for the creation of a new Global Standards Steering Committee. The Global Standards Steering Committee, with representation from Europe,
Asia and North America, is establishing “global standards for non-listed real estate vehicle reporting”. This will permit an alignment in regional standards and allow investors to compare fund performance across different jurisdictions. With the increased interconnectedness of real estate markets, especially on a global scale, the Canadian real estate fund industry should focus on discussing standards and best practices. Such standards and best practices should address the concerns of the Canadian market and be commensurate with what is happening globally. The objectives would be to provide transparency across fund investments, develop effective corporate governance frameworks that are aligned with industry best practice, and provide reliable and consistent information to investors. REALpac’s Fund Management Committee has established a Best Practices Sub-Committee to review and develop best practices and reporting standards for the Canadian context. REALpac is also undertaking a survey of the closed end fund world to determine the scope of the market, which has been notoriously opaque. REALpac is leading the way in getting Canada caught up. ■
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