Real estate investment trusts, hampered by falling unit prices, have been squeezed out of the commercial property market over the last quarter by private investors, a new report shows.
CBRE Limited, which provided an advance copy of its latest data to the Financial Post, suggests things are not going to get much better for REITs in the coming year either.
“Transaction volume is expected to be sustained by pension fund/advisors and private Canadian investors as REITs and real estate operating companies take more of a back seat,” says the report.
The absence of REITs doesn’t seem to have hurt the overall Canadian investment market which is forecast to reach $26.5-billion in 2013, one of the top three years in Canadian history.
CBRE hinted that the fourth quarter is expected to be particularly strong in the retail asset segment of the market, without mentioning any deals by name.
The Financial Post first reported this month that Bayview Village, an upscale mall located in Toronto’s north end had sold for $500-million — the highest price for a single piece of property this year. Sources have indicated the property was purchased on behalf of the British Columbia Investment Management Corp. from Orlando Corp., the company controlled by billionaire Carlo Fidani.
It’s not the only deal expected to be announced shortly. Sources also indicate the Canadian Pension Plan Investment Board is about to sell six malls across the country for $1.2-billion, the buyer being a group of smaller pension funds.
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Pension funds continue to be important players in the marketplace and have gobbled up 12% of the transaction volume over the first three quarter of 2012, but increasingly, private investors have been taking a bigger chunk of the market — accounting for 60% of all activity in the third quarter.
“The private guys have really filled the hole. You’ve got traditional private investors like your families but now you’ve got wealth management companies. The demographic is you’ve got to find something to produce income and there’s nothing better for producing income than real estate,” said John O’Bryan, chairman of CBRE, in an interview.
REITs have been hampered by the fact their cost of equity has risen dramatically as their share price has declined. The Bloomberg Canadian REIT index was off almost 10% over the first 10 months of the year.
Mr. O’Bryan thinks there is room for the REITs to rebound but perhaps not in the dramatic fashion that saw their popularity explode early in the decade.
“It won’t happen the way it did in 2010 and 2011 and part of 2012 which were perfect conditions for the REITs,” said Mr. O’Bryan, predicting some REITs will be sellers of property in the coming months.
The report shows investor interest has been spread fairly evenly across asset classes. In th
e third quarter, industrial space was the top asset class with $1.3-billion in assets purchased while the hotel class was at the bottom with $682-million in activity.
On a regional basis, the West continues to be a major driver of activity. The almost $1.7-billion in activity in the third quarter in Calgary and Edmonton was just behind the $1.8-billion in Toronto during the same period. ”It’s just following the jobs, real estate follows jobs,” says Mr. O’Bryan.
Neil Downey, an analyst with RBC Capital Markets who follows the REIT sector, says he’s not that surprised to see the REITs being shunted aside.
“You look at the at the amount of equity being raised in the public markets and it directly corresponds with this pattern [of decreased investment activity],” said Mr. Downey, noting REITs raised about $6.8-billion in equity and equity-related capital in 2o12. Compare that to the third quarter of this year $560-million was raised and $460-million of that money was for Choice REIT, Loblaws new trust entry.
Nevertheless, he says the activity is good news for REITs because prices are not dropping for real estate, just for REIT units. “The REITs have probably fallen to some sort of discount to net asset value,” said Mr. Downey, adding he thinks it’s probably too early for them to be takeover targets.