Analysts around the world are involved in a debate over whether the Canadian commercial real estate market, which has been red-hot in recent years, is heading for a crash.
The country’s pension funds, insurance companies, and real estate investment trusts, have been key players in the sector and have been saying that the market appears to be peaking for at least 12 months.
If, following this, there were to be a downturn there are fears that the players would not be adequately prepared for the market changes.
Richard Johnson, of UBS Global Asset Management, held a meeting with pension fund representatives in Toronto last month and explained that his firm is concerned about their “level of exposure to Canadian real estate.”
He said that with most Canadian institutional real estate investment focused on the domestic market, pension funds could be “seriously overexposed” if there was a downturn in this market.
According to Investment Property Databank Ltd., Canadian commercial real estate has been realising a 10-year annualized return of 11.9 per cent. It is the highest rate of all countries covered by IPD, except for South Africa. Equities have been generating a return of 8 per cent and bonds have been around 5.6 per cent during the same period.
Several factors have driven the country’s commercial real estate market to these levels over the past five years. Pension funds and REITs have a lot of cash to invest, which leads to competition over A-list assets. Canada’s status as a safe place to invest in the wake of the financial crisis has also led to foreign investors wanting to put their money here.
USB predicts that total return on Canadian commercial real estate in the next three years will be in the six per cent range.
William Hughes, the firm’s head of global asset management real estate research and strategy group, stated recently that the market’s performance will be affected more by perception than any substantial changes.
He went on to say that if investors choose to seek out more risk to get higher yields, some of those who were attracted to Canada may decide to put their money elsewhere, which will ultimately bring down real estate values.
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