Canadian commercial property market heading into another strong year: CIBC

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: 
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CO: CIBC World Markets
ST: Ontario
-0- Apr/10/2013 11:38 GMT
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