Canadian commercial property market heading into another strong year: CIBC
REIT returns to remain attractive, fuelled by low rates and solid fundamentals
TORONTO, April 10, 2013 /CNW/ - Canada's commercial real estate sector and
REIT investment market appear set to outperform for a fifth-straight year,
according to CIBC World Markets Inc.
"All of the fundamentals seem to be supporting [the] continuation of [an]
extended recovery" from the market lows of 2008, says Allan Kimberley,
Vice-Chairman, Real Estate Investment Banking at CIBC.
In a series of notes released today at the bank's 18(th) annual real estate
conference in Toronto, CIBC says low interest rates, the continued
availability of equity and debt, and healthy supply-demand fundamentals have
set up Canada's real estate capital markets for another strong year. These
conditions are relatively unchanged from 2012 which saw "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," says Mr. Kimberley.
Alex Avery, a CIBC Equity Analyst who covers the commercial real estate
sector, also sees favourable property and REIT market conditions continuing in
2013, with one caveat. "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."
Mr. Avery says returns from REITs in 2013 will be driven by attractive
distribution yields and modest further appreciation in unit prices. Over the
next 12-18 months he's forecasting returns to "average 5-10 per cent,
comprising close to 6 per cent in average yield and 0-5 per cent in capital
appreciation." REITs most likely to outperform will be ones that deliver the
highest funds from operations (FFO) growth, he says.
"With more than a dozen new REIT formations during 2012, and the potential for
as many in 2013, the Canadian REIT universe is expanding rapidly to offer
investors numerous new alternatives," he adds. "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
Two factors that can spoil attractive property fundamentals - the cost and
availability of debt and supply of new developments - remain muted and will
likely remain so this year, according to Mr. Avery.
"Wide spreads and forecasts for higher, but still low benchmark interest rates
suggest favourable borrowing conditions could continue. Committed and proposed
development activity currently remains measured in the context of the overall
inventory of investment property in Canada, notwithstanding development
proposals having picked up sharply in recent months."
In a separate note, Avery Shenfeld, Chief Economist at CIBC, says the real
estate market will be supported by "national vacancy rates for both office and
industrial space [which] are likely to remain well-contained" while "retail
properties will continue to benefit from new entrants from the U.S."
Meanwhile, the combination of historically low interest rates, accessible
credit markets, a high-yield market that continues to expand and healthy
corporate fundamentals should support M&A activity. "We expect M&A activity
could continue in 2013, with privatizations among the higher-quality and
larger capitalization REITs, and mergers between smaller capitalization
REITs," says Mr. Avery.
In 2012, real estate was the third most active sector in Canadian M&A, behind
oil and gas, and diversifieds.
The notes by Mr. Avery, Mr. Kimberley, Mr. Shenfeld are available at:
CIBC's wholesale banking business provides a range of integrated credit and
capital markets products, and investment banking to clients in key financial
markets in North America and around the world. We provide innovative capital
solutions and advisory expertise across a wide range of industries as well as
top-ranked research for our corporate, government and institutional clients.
please contact: Tom Wallis, Communications and Public Affairs at
To view this news release in HTML formatting, please use the following URL:
CO: CIBC World Markets
NI: FIN ECOSURV ECO
-0- Apr/10/2013 11:38 GMT
Press spacebar to pause and continue. Press esc to stop.