In 2018, investment in Canadian real estate turned out to be a broadly lucrative venture for the country’s institutional investors, especially when compared with how poorly equities performed during the year, according to Simon Fairchild, executive director at MSCI Inc.
Speaking at an event in Toronto on Friday, Fairchild described how MSCI’s Realpac Canada property index tracks the holdings of a number of Canada’s largest institutional players, including the Canada Pension Plan Investment Board, the Alberta Investment Management Corp., the Canada Post pension plan and the Canadian Broadcasting Corp. pension plan.
For 2018, the total asset return for the Canadian sector was 7.9 per cent on the index, whereas the U.S. return was 7.2 per cent and the U.K. yielded six per cent, doing arguably well under the circumstances of a contentious Brexit environment, noted Fairchild, although he said this does lag 2017’s returns.
Industrial and residential properties fared the best, with 2018 returns at 13.8 per cent and 11.5 per cent, respectively. This isn’t especially surprising, said Fairchild, but what is notable is that the gap in returns between burgeoning industrials and struggling retail real estate is the widest it’s been in over a decade. Super large malls, in particular, pulled the sub-sector down in 2018.
Halifax retail real estate was the most significant rough patch when breaking returns down by sector and region together, with a negative return of almost 10 per cent. Toronto industrial real estate, by contrast, was the strongest asset at just over 14 per cent.
Overall, Halifax real estate yielded a negative 1.1 per cent return. Toronto saw the highest returns at 11.1 per cent, followed by Vancouver with 10.6 per cent and Ottawa at 7.7 per cent. Both Calgary (1.4 per cent) and Edmonton (2.6 per cent) have shown a gradual improvement, where historically returns have struggled. Those western cities proved important to the overall good health of the index, said Fairchild. While there’s been a focus on the boon provided by the recent success of industrial real estate, the broader Canadian picture is better because Alberta’s cities are performing less badly, he said.
“The year-end results are certainly representative with what we’ve seen built into the markets,” said Steve Marino, senior vice-president of portfolio management at GWL Realty Advisors Inc., speaking on a panel at the event.
Canada was the best performing locale for real estate, said Michael Turner, president of Oxford Properties, an arm of the Ontario Municipal Employees Retirement System. “I think we produced a 13 per cent return in our Canadian business and that would include leverage.”
Carefully choosing location is the key to sussing out optimal returns, said Turner. “Picking buildings is important, but picking sectors and cities is about nine-times more important than the building you pick.”
Marino said he sees room for improvement in Alberta’s cities. “It feels like the industrial markets in Edmonton and Calgary are on their way to recovery and stabilization. We’re certainly seeing rents improve in a material fashion. The residential market is in recovery.”
As far as risk goes, it’s important to remember the role real estate plays in the overall portfolio, said Emily Hanna, partner in investments at Crown Reality Partners Inc. “If public equities start to plummet again and there’s a responding need for liquidity then we may see REITs start selling off some assets.”
However, there’s still so much demand for interesting real estate opportunities, she noted, and such a sell-off wouldn’t result in an oversupply and, by extension, a dip in real estate returns.
There’s also a possibility that a flock away from more volatile public equities would push demand for real estate higher, said Marino. Although, since real estate has been doing so well recently, there’s also a chance investors will start wanting to rebalance, since the growth they’ve seen in their real estate assets could tilt the portfolio too far in one direction, he said.
According to Marino, investors could soon be saying, “you’ve done such a great job that we have to take some money off the table because now we’re over-allocated to real estate.”