Often overshadowed by the US, Canada has become attractive to investors looking for stability. Stephanie Schwartz-Driver reports
Canadian institutional investors are increasingly looking for opportunities abroad, but for real estate investors from the rest of the world, the stability of Canadian property remains very appealing. "In Canada, many things have remained constant," says Blair Tamblyn, CEO at Timbercreek Asset Management. "On a broad basis, Canada is an attractive place to invest, and others have realised that."
To a large extent, the country owes its economic stability to the prudence of its financial sector. With a highly disciplined banking industry, debt has not been the destabilising influence it has been elsewhere in the world. When debt is perceived to increase too much there is an immediate response. There is currently some concern that consumer debt has increased too quickly, and the government has already acted to dampen it down.
In the Canadian real estate sector specifically, there is around half the debt as there is in the US real estate market. Even the REITs, which are significant players in Canadian real estate because of their access to capital, tend to structure their deals with a maximum loan-to-value ratio of 50%. Canadian pension funds employ almost no debt.
Although Canadian real estate is attractive, there is "a perception that good deals are hard to come by", says Blair McCreadie, fund manager for Standard Life Investments. "Like any other market, there is a lot of opportunity, but foreign investors need to access it either through a local partner or an investment manager running pooled funds."
There is a healthy volume of transactions, according to Paul Zemla, CIO at Bentall Kennedy, which means the potential is there. "The foreign view is ‘don't bother'. But we say ‘no, you can bother, it is well worthwhile'. The question is how you do it."
Zemla emphasises that foreign investors need to be quick and responsive, and have a strategy in place so that when opportunities arise they are ready to move.
Although there is a notion that the big Canadian pension funds hold on to core properties, this is not totally true. Pension funds and REITs do hold a lot of real estate, but they are also the ones providing product for the next sale.
Two factors result in pension funds selling, according to Zemla. Firstly, pension funds are also developers, building most of the trophy buildings. When one is complete, they will often sell something behind. Secondly, many pension funds are fully invested domestically and are looking to other real estate markets, selling in Canada in order to invest overseas.
For Bentall Kennedy, Canadian investors' interest abroad creates two kinds of opportunities. Not only does it create chances for other investors to compete for prime properties, but Bentall Kennedy, with its US operations, can also help them move abroad. "Most of the international investment so far has been by the largest pension funds, but now the next tier has started to investigate their options," said Zemla. "Most make their first foreign investment into the US. And for the last three years, we have observed increased interest by Canadian pension funds into the opportunities created by the downturn in the US."
Foreign investors looking at Canada tend to focus on the office sector, and on major markets, especially Calgary and Toronto. But there are many opportunities in other locales and other sectors. "Large institutional investors outside Canada tend to look for triple-A office or super-regional malls. These types of assets do not come around very often," says Corrado Russo, managing director, global real estate securities at Timbercreek. "To make inroads, investors have to focus on smaller assets, not in central locations, but still very attractive."
Domestic pension funds "do own the top slice", says McCreadie. But, he says, "we have around $20bn (€808.4m) in transactions [every] year. There are thousands and thousands of transactions under that slice."
Standard Life is currently raising funds for its second Canadian fund - the first topped CAD$1bn this July. The new fund, which will be semi-open-ended, will use debt as part of the strategy and will move up the scale opportunistically, incorporating more active management, redevelopment, and some development projects. McCreadie categorised it as core-plus.
But even further up the risk scale, Canada's famed economic stability gives its real estate a significant role in foreign investors' portfolios, said McCreadie. "Our experience shows European investors do not give Canada a lot of thought because the US is such a big market. But they can use Canada as a stabiliser in their North American real estate allocations."
He added that "it is a beta product, not an alpha product" for international investors.
Remco Daal, president and COO at Bentall Kennedy, said: "We do not have the same level of opportunities to move up that risk curve as there is in the US, at this point in the cycle." Instead, the firm is looking into the opportunities created by active management. "We can do very handsomely for our clients by moving into the development space. There are opportunities to reposition assets, renovating and releasing or developing new space." Daal says growing urbanisation is one reason behind demand for mixed-use and urban-infill developments.
McCreadie at Standard Life agrees that urban development is intriguing. "We will always have a focus on the Toronto area. It is a major market, a major population centre, and it will continue to attract new immigrants," he says. "The next big thing is working in old neighbourhoods in urban areas and re-purposing. This will create value." He also is interested in the growing energy economies of western Canada, where "you could pick up good properties at good prices and see rental growth opportunities, especially in markets that are underserved."