More and more global investors are turning their attention to just four Canadian cities, prompting fears of a new commercial property bubble, claims a five-year forecast.
The brokerage firm Jones Lang LaSalle (JLL) says that rising demand from global investors for commercial properties such as offices, shopping malls and factories in Toronto, Vancouver, Montreal and Calgary is unfairly inflating the value of investments. The threat of a new rush of money is also troubling Canadian investors who fear that an asset bubble could form if overseas institutions continue to bid up the price of property.
According to recent figures from the Investment Property Databank (IPD), the 10-year annualised return from Canadian commercial real estate is 11.9 per cent, second only to South Africa. It’s those stellar returns that have spurred an increasing number of investors to pour money into the market.
Traditionally, as JLL points out, Canada has one of the lowest proportions of foreign capital invested in its real estate market in the world. The sector is dominated by local pension funds, insurers and investment trusts and it’s their local knowledge that has given them an edge over foreign players when it comes to winning key assets.
“This should not be interpreted as a lack of demand by foreign investors, many of whom remain keenly interested in the Canadian market, it is merely a lack of transaction success,” the asset management specialist explains. “Compared to other countries with similar property markets and transparency attributes, such as Australia, Canada stands out as being one that foreign groups find particularly difficult to penetrate.
“For example, while inbound investment in Australia has regularly exceeded 30 per cent of total investment, only an average of 10 per cent of all transactions in Canada since 2007 have involved foreign groups — with 2012 marking a low point of only one per cent.”
JLL also notes that Canadian property investors have started to turn their attention abroad as Canadian properties increasingly more expensive. “Serious stress marks are beginning to show,” said one analyst. “This year has seen indications that the top-end property market is nearing its peak.”
The declaration that the four cities are punching well above their weight is based on a number of factors: massive infrastructure spending, strong and positive urban strategies, and new efforts to bolster tourism by the Canadian Tourism Commission.
“We anticipate that over the next decade the ‘Quartet’ cities will firmly secure their places on the world stage with all four cities regularly featuring among the world’s top 30 real estate investment destinations,” concludes JLL’s forecast.
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