It’s not exactly the 11th province just yet, but Canadian companies have been gobbling up property in the United States like never before.
We are easily outpacing every other country in what is called net real estate investment in U.S. commercial property, even ahead of a combined Europe.
There appears to be one overriding reason for the trend — there is just less and less available to buy back home.
The catalyst for increased purchasing activity, which PricewaterhouseCoopers LLP says has seen Canadians buying about US$27-billion more in property in the U.S. than Americans have purchased here over the past four years, has been a unique set of market conditions.
Just like the U.S. housing market, commercial property prices were depressed south of the border giving Canadian companies the opportunity to swoop in. And, just like the snowbirds, a strong dollar and access to cheap and available Canadian financing allowed those companies to outbid local competitors.
“You might not want control of the market,” said Andrew Warren, director of research with PwC, joking about the state U.S. real estate has been in for the last half decade.
But even at the present pace, which started to gain steam as far back as 2006, it would take a long time before Canadians controlled the multi-trillion dollar U.S. marketplace. We were not even close to 1% of the total invested in the last year in America, says PwC. However, Canada’s dominance is impressive.
And the U.S. has emerged as fertile ground to grow your Canadian real estate. CB Richard Ellis says the entire amount of commercial activity in Canada will be $26-billion this year, making the U.S. real estate investment amount impressive by comparison.
Assets that pop up in Canada, especially the high profile ones, are gobbled up by hungry pension funds and, up until this year when their unit prices wilted, Canadian real estate investment trusts.
As first reported by the Financial Post this past week, there was a long list of suitors for Toronto’s Bayview Village shopping mall, an upscale but small centre that fetched $500-million and sold for a capitalization rate said to be in the 3.6% to 3.7% range.
The cap rate — the rate of return an investor is willing to accept on a property — is considered to be near a record-low. Based on a 4% rate, the income stream means it would take 25 years for the property to pay for itself.
Before Bayview Village, it was Toronto’s iconic Scotia Plaza in the heart of the city’s financial district which sold for an astounding $1.2-billion in 2012.
“Expansion is part of the story. I see it in my client base. A number of Canadian real estate companies looking to expand see wonderful opportunities in the States, especially now that it has turned the corner. There was a feeling the last couple of years that the real estate market had bottomed out and is now poised for recovery,” says Chris Potter, a national leader in real estate tax practice with PwC.
Office space has been the most desirable property class for Canadian investors with close to US$4.2-billion purchased in the 12 months ending Aug. 31, 2012 . Apartment buildings were second at almost US$2.8-billion followed by industrial space at a little over US$2.1-billion.
PwC says the majority of Canadian buyers last year were public companies which purchased US$4.6-billion in property in the United States in the year ending Aug. 31, 2013. Institutional investors, like pension funds, were second at US$2.3-billion last year followed by private entities at US$1.3-billion .
The question is how much steam is left in this trend? Though the Canadian companies had close to US$8-billion in net investments with the U.S. in 2013 as of Oct. 4, the figure is dropping. It peaked in 2012 at about $9-billion.
“There was a period of time when liquidity was a lot easier to get and financing was a lot easier to get in Canada than in the United States and Canadians going down to get property had an advantage because they were coming to the table with cash and financing in place,” said Mr. Potter. “You can argue some of the best deals have been done but there are still opportunities.”
The story is changing to a degree. Canadian REITs have faced a decline in their value making it tougher for them to make accretive deals. The Bloomberg Canadian REIT index has dropped by about 10% this year.
Thomas Hofstedter, chief executive of H&R REIT, one of the largest trusts in Canada with a history of owning property in the U.S., notes there have been very few purchases south of the border this year.
“It’s an antiquated view, maybe that was happening in the first quarter of the year,” said Mr. Hofstedter. “The United States is now being bought back domestically by a lot of high net worth individuals because funding is back again.”
“At a certain point it’s just too tough to grow [in Canada alone]”
Ed Sonshine, chief executive of RioCan REIT, says Canadians probably won’t disappear from the U.S. landscape any time soon.
“Every forecast I’ve seen expects growth in the United States over the next two to three years to be better than here,” said Mr. Sonshine, adding a shrinking dollar has taken a bite out of the Canadian appetite for property.
Long-term he says it’s becoming more difficult for companies like RioCan and pension funds to grow in the Canadian market place.
“As companies get better, you just can’t grow anymore,” said Mr. Sonshine. “It’s one of the driving facts, you’ve got to keep growing and at a certain point it’s just too tough to grow [in Canada alone].”
The United States, he adds, with its diversity and growth and with more like 11 or 12 times our market size and its proximity, along with the same language and similar laws, makes it more akin to a domestic market than going further afield for purchases.
“The fact they speak English drives it a lot and the proximity,” said Mr. Sonshine. “You are in Toronto or Calgary or any of our offices, you can get to the big cities very quickly. I can get to Dallas, in what two and half or three hours, big deal, and Dallas is pretty far away.”
Paul Finkbeiner, president of GWL Realty Advisors, which acts for pension funds, says there will always be an appetite for American property. “It’s easiest to go the U.S. because it is similar to Canada. Not all the opportunities are picked over. It might have been easier to get your head around them in 2012. In 2013 there are less deals. But are still better opportunities down there and abroad than there in Canada.”
Source: Garry Marr – Financial Post