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Canadian Commercial Real Estate Remains Attractive to Foreign Investors


Under Market Updates

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July 27th, 2016

Strong foreign investment in residential real estate in Vancouver prompted the BC government to announce yesterday that it would impose a 15% property tax on foreign buyers to make it more difficult for them to enter the market. No such tactic is likely to be used in the commercial real estate sector however. Foreign investors, mainly Asians, spent $1.3 billion buying Canadian commercial real estate in the first half of the year and will probably continue to do so. Canada, with its stable property sector and low dollar, is an attractive market for foreign capital investment. Toronto, Vancouver, and Montreal are the primary markets attracting foreign investment, according to Morgard Corporation’s second quarter 2016 Economic Outlook and Market Fundamentals Report.

The largest single investment in the quarter was the purchase of Vancouver’s Bentall Centre for over $1 billion, showing the high level of interest and confidence on the part of foreign groups in Canadian commercial properties. One theme that is common to both commercial and residential real estate sectors is the shortage of available properties. The Morgard report says it expects demand to continue to outdistance supply of Class A assets available for acquisition.

Regarding Britain’s decision to leave the EU, Morgard foresees the impact of that decision on the Canadian economy and specifically on the commercial real estate market as being moderate, with a “marginal” dip in exports to the UK over the near term. Britain is Canada’s third largest trading partner, but accounts for just 3 per cent of total exports. The Brexit vote will, however, have the effect of suppressing interest rate increases, keeping yields on fixed income investments at all-time lows. This, Morgard says, will translate into continued support for real estate investment.

Canada’s commercial real estate market remains attractive to foreign investors. Investment in Canada’s real estate sector will remain steady in the face of stable interest rates and overall incomes, despite the forecast deterioration of leasing fundamentals in some markets. Over the short to mid-term, investors can expect that commercial property investment demand will continue to outpace the supply of the highest quality Class A office properties available for purchase.

High levels of household indebtedness, driven largely by mortgage credit and house price inflation, will continue to preoccupy policy makers, Morgard believes, particularly the increase in mortgages with high debt-to-income ratios. The financial vulnerability of consumers has worsened compared to the recent past, which could have consequences for lenders and mortgage insurers.

Indeed, the Office of the Superintendent of Financial Institutions (OSFI), the regulator of Canada’s banking industry, said today that it will require the country’s banks to conduct stress tests to determine how they would withstand a drop in property prices of 50% in Vancouver and 40% in Toronto. Stress tests are carried out regularly as part of financial institutions’ risk management programs. They are basically intended to determine whether a bank has sufficient capital to withstand the impact of severe adverse developments, such as sudden high numbers of defaults on loans, or a crash in equity or housing markets.

On the retail front, Morgard says there are two trends at work, creating both opportunity and challenges for retailers. One is the increase in online sales, which has benefited those retailers who have been able to develop appropriate digital strategies to boost sales, while forcing “less fortunate” retailers to lose sales in their bricks and mortar stores. The other trend, involving changes in shopper behaviour, has led to downsizing in the retail sector and a reduction in net leased space, the report says. Some retailers have opted to leave “power centre boxes” and move to smaller enclosed mall locations.

In Toronto, the biggest retail event since the opening of Saks Fifth Avenue this past spring is the much-anticipated arrival of high-end department store Nordstrom. In September, Nordstrom will open its new Eaton Centre location, where it will occupy the space originally occupied by Eaton’s when the Eaton Centre opened, then by Sears. Nordstrom is itself experiencing challenging times as it struggles with more and more online competitors and changing consumer spending habits. Nordstrom was reportedly hiring to fill 1,600 positions at two new stores opening in the GTA this fall.

Canadian Commercial Real Estate Remains Attractive to Foreign Investors by Josephine Nolan | Condo.ca

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