investment
RARE RETU Canada Annual Property Index Records a Loss in Value for 2020
By Barbara Carss NO WINNER WAS declared this year i n t he a n nua l R E A LPAC / MSCI challenge to peg the investment performance of directly held standing assets in the Canada Annual Property Index. That’s likely because no one foresaw a 1,000+ basis point slide in the 2020 average total return — settling at negative 4.1% — when the annual contest was conducted 12 months earlier. A ten-year run of capital growth abruptly reversed, resulting in a 7.8% loss in value across the 2,356 assets that the 44 portfolios represented in the index collectively hold. Income retur n continued the record-setting downward trajectory witnessed in 2018 and 2019, dropping 70 more basis points to 3.9%. “That’s not just down to the cap rate suppression we were seeing before; it’s really out of income suppression,” Simon Fairchild, Executive Director wit h t he index producer, MSCI, advised during the online release of the 2020 results earlier this winter. “Performance in 2020 is more severe than we experienced in the financial crisis. You have to actually go back to t he deepest yea rs of t he 1990s’ 6 April/May 2021 | Canadian Property Management
recession to see similar falls in value — in 1992, 1993.” The overarching numbers hide a more uneven picture. Industrial once again emerged as the top-performing property type, delivering a 12.7% total return. Multifamily also remained on the plus side of the scale, recording a 5.7% total return. In counterbalance, office and retail, which together account for more than 68% of index value, pulled the average down with total returns of negative 1.5 % and negative 15.1%, respectively. Canada’s 2020 decline was steeper than in the United States where MSCI index results show investors realized a modest average total return of 1.8% down about 4% from 2019. Meanwhile, investors in the United Kingdom experienced less slippage, recording an average total return of negative 0.8%. Industry insiders tasked with providing on-the-spot reaction to and context for the Canadian returns point to differences in market size, relative weight of property types within the index and responses to the COVID-19 pandemic as u nderlyi ng reasons for nat iona l discrepancies.
“I suspect in the all-property index, Canada is being skewed a little bit by the office and retail component and that is impacting those capital returns,” hypothesized Peter Cuthbert, President and Head of Global Real Estate with Fiera Real Estate Investments. “Two bad quarters — quarter 2 and quarter 3, with quarter 2 being particularly bad — have made a difference.” STRATIFIED RESULTS Looking at the capital growth and income return splits for all property types, retail took the biggest hit, with a 17.8% loss of capital value and an income return of 3.2%. It suffered a 30% drop in net operating income relative to 2019, compared to a 13% decline across all properties. While both industrial and multifamily properties recorded capital growth — at 7.8% and 2.2% respectively — only industrial saw year-over-year income growth, at 1.2%. Office properties, equating to 37% of the index value, lost 5.9% of capital value with an income yield of 4.7%. The sector experienced a 2% decrease in net operating income for a better year-over-
