Canada\u2019s reputation as a haven for capital continues to stoke foreign and domestic investments in commercial real estate, according to recent reports and commentary by Vancouver experts.<\/p>\n
The average national cap rate, a measure of real estate value to owners, has been declining steadily since 2009. The most significant diminishing factor of a cap rate is usually high real estate prices.<\/p>\n
It dropped to 5.9% in the second quarter of this year, marking the first time it has fallen below 6%, according to CBRE\u2019s quarterly report on cap rates and investment trends.<\/p>\n
To get the cap rate, the expected return on a real estate investment is first calculated by taking a property\u2019s gross income and deducting from that various costs such as property taxes, maintenance and management to arrive at the net operating income. The cap rate is that net operating income divided by the purchase price of the property.<\/p>\n
One of the causes of skyrocketing prices and falling cap rates has been strong demand by foreign investors. By the end of the first quarter of 2016, foreign investment into Canadian commercial real estate exceeded $1.0 billion, surpassing the 2015 total by 28v, according to CBRE. By the end of June, $2 billion in foreign capital had come into the Canadian market this year, or 19% of the $10.6-billion total in commercial real estate investment, the report said.<\/p>\n
Vancouver received 72% of that national foreign investment in the first quarter, although a few deals with massive price tags accounted for most of that, said Jim Szabo, CBRE\u2019s vice-chairman of capital markets, in Vancouver.<\/p>\n
\u201cWe just traded Bentall Centre I, II, III, and IV for just north of a billion dollars,\u201d Szabo said, referring to Anbang Insurance Group Co. Ltd. of Beijing buying a 66% share of the complex owned by Ivanho\u00e9 Cambridge in downtown Vancouver. (More recent reports indicate that Great-West Life Assurance has reached a deal to sell the remaining interest in the Bentall Centre to Anbang group for approximately $367 million.)<\/p>\n
In January, German billionaire Klaus-Michael Kuehne paid about $400 million for Royal Centre, a 36-storey building at 1055 West Georgia St. in Vancouver.<\/p>\n
\u201cThose assets in our market are very, very rare,\u201d Szabo said. \u201cThose attract the larger funds and the larger sources of overseas capital, but there\u2019s a significant amount of mid- to smaller-sized office buildings that have traded over the last 24 months.\u201d<\/p>\n
Szabo said the running total of annual foreign investment over the past four years as been about 15% of the market. \u201cThat popped to 33% last year in Vancouver, and it\u2019s not just in Vancouver. If we look at 2016 \u2026 right across Canada, it\u2019s 19% of the total investment market.\u201d<\/p>\n
When assessing cap rates, it\u2019s standard practice to compare the rates to Government of Canada bond rates, Szabo said. \u201cWhat we have right now is the largest gap in bond rates compared to current cap rates that we\u2019ve ever seen,\u201d he said, noting that cap rates tend to float around 250 to 300 basis points over the Canada bond rate.<\/p>\n
Now, cap rates are 489 basis points above the 10-year bond rates. \u201cIf you ask me where cap rates are going \u2014 provided bond rates don\u2019t go up \u2014 I think there\u2019s probably more compression coming,\u201d he said. \u201cMost people would rather own real estate today than buy the bonds.\u201d<\/p>\n
Many property owners are now taking advantage of conditions to achieve once-in-a-generation pricing, according to Collier International\u2019s own quarterly assessment of local and national cap rates, which marked A-class downtown Vancouver office cap rates at a high of 4.5% for the second quarter of this year. (Industrial cap rates stayed flat at 4.25 to 5% for single-tenant class-A properties, retail also remained flat at 4.25 to 5%, while multi-family apartment cap rates were listed at 2.25 to 3% for highrise properties and 2.75 to 3.5% for low-rise).<\/p>\n
\u201cInvestors are counting on increases in capital value as opposed to earning an annual yield,\u201d said Chris Blanchette, managing director with Colliers in Vancouver. \u201cI\u2019ve been in this business for 43 years and I can remember a day when apartment buildings would trade at eight and nine per cent cap rates, and now we\u2019re well under 3% in many locations. Certainly in the more popular locations we\u2019ve seen trades at 2 to 2.5%.\u201d<\/p>\n
He said the reason for low cap rates is simple. \u201cIt\u2019s clearly telling us that the investor doesn\u2019t give a hoot about how much they are going to earn on an annual basis in terms of annual yield. They\u2019re counting on selling the property in six months or a year or five years.\u201d<\/p>\n
The market reports suggest that investment is strong and will remain strong \u201cbecause as expensive as things are here, there are other places on this planet where they are way more expensive,\u201d Blanchette said.<\/p>\n
\u201cWe\u2019re seeing outside investors coming in and buying properties here at a very low cap rates because there is a significant demand to get into the Vancouver market place,\u201d he said.<\/p>\n
\u201cThere\u2019s so much money chasing so little product and there\u2019s so much money available by lenders,\u201d said David Goodman, a principal with the Goodman Report. \u201cWe\u2019re not just talking about the Canadian Mortgage and Housing Corporation, we\u2019re talking about conventional lenders that are offering phenomenal terms,\u201d he said. \u201cI think it\u2019s added fuel to the fire.\u201d<\/p>\n
He said Vancouver\u2019s market is now in the same category as cities like London, San Francisco and Zurich. \u201cThe world recognizes that Vancouver is a place where it\u2019s safe. They can park their money, sleep well at night. There\u2019s stability here and there\u2019s massive immigration growth.\u201d<\/p>\n
CBRE\u2019s Szabo said foreign capital could be the game-changer. \u201cIf foreign capital pulls up and stops pursuing assets in Canada, Vancouver or Toronto, then that would create less demand and you would see prices ease,\u201d he said. \u201cThat\u2019s a possibility.\u201d<\/p>\n
Brexit could also muddy the investment waters as investors in the UK could re-aim their capital over the next year or more, he added. \u201cThat capital has to go somewhere and it always tends to go to safe havens,\u201d he said. \u201cRight now, North America \u2014 not just Vancouver \u2014 looks pretty safe.\u201d<\/p>\n