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TORONTO: Canada's resilient economy, rising rents and easy borrowing are fuelling a buying spree among real estate investment trusts (REITs), highlighted this week by the largest office property deal ever by a Canadian REIT.
The boom shows no sign of cooling even as prices for prime office space in Canada's urban centres rise to the lofty levels of 2007 — before the global recession, whose effects linger in the United States and Europe.
Not so in Canada, which climbed from the abyss of 2008 with relative ease and is now enjoying a steady recovery with the help of a robust banking sector willing to lend at very low interest rates.
Commercial real estate has been a prime beneficiary, fuelled by cash-rich REITs, the vehicle of choice for investors to participate in the market.
Rock-bottom rates have encouraged buyers, while sky-high prices — and a sense that the apex is close at hand — have motivated sellers, analysts say, creating the right climate for big deals.
"In this environment there are a lot of vendors thinking: 'You know, can it get a lot better?' You've got unbelievably low interest rates and the economy has held up pretty well," said Karine MacIndoe, an analyst with BMO Capital Markets, the investment banking arm of Bank of Montreal.
"So I'm sure we'll still have a few more IPOs and large deal sizes coming," she said.
To date, no Canadian office deal has ever topped the one struck by Dundee Real Estate Investment Trust. Last Thursday, it said it was buying 29 properties from US private equity giant Blackstone Group for C$831.8 million (RM2.6 billion).
Minutes after that deal was announced, TransGlobe Apartment Real Estate Investment Trust said it would buy an apartment portfolio worth C$740 million, while Allied Properties Real Estate Investment Trust unveiled C$179 million in acquisitions in Toronto and the West. All told, Thursday saw at least C$1.75 billion in REIT-related acquisitions.
"The capital is flowing to the REITs and the REITs are deploying it across the board I think," said Heather Kirk, a real estate analyst with the National Bank of Canada.
REITs invest in commercial real estate and offer investors a way to profit from rising in property values, with the added benefit of liquidity from the equity market.
Investment strategists see them as a safe, high-yield alternative to bond options or other yield equities.
"If you look at the demand picture, in terms of how these deals are selling, I think there's a pretty strong message that you'll continue to see capital flowing there, which means prices will continue to have an upward bias," Kirk said.
The Blackstone properties, on the block since May, were marketed via a two-track process that simultaneously contemplated either an initial public offering or an outright sale. Sources say the assets were hotly contested by prospective buyers.
The properties, being sold by co-owners Slate Properties and Blackstone, are located in Toronto, Canada's financial centre; Ottawa, the national capital; and Calgary and Edmonton, the biggest cities in oil-rich Alberta.
In square footage terms, more than half of the new office space was in Toronto. That may signal a resurgence of real estate markets in Eastern Canada after several years in which the resource-laden Western provinces dominated.
"The interesting thing is that even as prices get close to [2007] levels, the interest rate environment is a lot more attractive than it was at that point, so the spread you can get is a lot more attractive," said MacIndoe.
"That's ultimately what's supporting it all. So unless the yield curve moves, this game continues." — Reuters
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