Canada’s commercial property market is performing very well and CIBC World Markets Inc is forecasting that it may outperform for a fifth year in a row.
CIBC said that the combination of low interest rates, the availability of debt and equity, and “healthy supply-demand fundamentals” have put the Canadian market in this favorable position.
Allan Kimberley, the Vice-Chairman of Real Estate Banking at CIBC, said, “All of the fundamentals seem to be supporting [the] continuation of [an] extended recovery” from the market lows of 2008.”
Conditions have remained constant since 2012, according to Mr. Kimberley. That year produced, “record levels of new issuance, total returns exceeding those of the broader S&P/TSX Composite index, a growing list of IPO and M&A activity, against a backdrop of declining volatility.”
Alex Avery, an equity analyst with CIBC, who covers the commercial real estate sector, also sees 2013 as being a good one for property and REIT market conditions.
“While current real estate and REIT investment market conditions remain highly attractive in many respects, property and REIT pricing have risen largely to reflect the favourable current environment. We expect attractive returns from Canadian REITs in 2013, but more modest than seen in recent years,” he said.
Mr. Avery went on to say that returns from REITs will be driven by modest appreciation in unit prices and attractive distribution yields. Over the next year or 18 months, Avery is forecasting investors will get returns of 5-10 per cent, made up of approximately six per cent in average yield and up to five per cent in capital appreciation.
REITs that are most likely to outperform these predictions will be the ones that will provide the highest funds from operations (FFO) growth.
Avery points out that more than 12 new REITs were formed last year and there is the potential for the same number in 2013. These new entrants offer investors several new alternatives.
He went on to say, “We believe these new entrants offer the greatest opportunity for investors to outperform the broader REIT group, with smaller, growth-oriented REITs offering significantly higher FFO growth potential than the larger capitalization, more established REITs.
“However, these new entrants also tend to lack liquidity and a public track record of financial results and/or of management ability to execute strategy.”
The two factors that can put a damper on the property market – high interest rates and lack of supply of new developments – do not seem to be a factor in 2013. Favourable borrowing conditions for investors are likely to continue. Across the country, vacancy rates for industrial and office properties are expected to remain “well contained.” Retail properties will benefit from the influx of new investors from the United States.
