KingSett Capital Inc., one of Canada’s largest private-equity real estate firms, is in talks to take a 50 percent stake in Scotia Plaza, the country’s second-largest office tower, according to people familiar with the deal.
KingSett will buy a 17 percent stake from Dream Office Real Estate Investment Trust, which owns two-thirds of the building, and the entire stake held by H&R Real Estate Investment Trust, which owns about a third of the tower, according to the people who asked not to be identified because the talks are private.
Representatives for H&R REIT didn’t immediately respond to requests seeking comment. Representatives for KingSett and Dream Office declined to comment.
Dream Office units rose the most in seven years in February after announcing plans to sell C$1.2 billion ($930 million) of assets over the next three years and cut its distribution to help cope with the slide in oil prices which has led to lower rents and vacancies in its Alberta properties. Its units are still down 29 percent in the last 12 months.
Bank of Nova Scotia sold the 68-story, 2 million square foot (185,806 square meter) tower for C$1.3 billion in 2012 to the two REITs, the biggest office sale in Canada at the time. The building in Toronto’s financial core is Canada’s second-largest office tower after First Canadian Place.
H&R REIT’s net proceeds would be about C$220 million, after debt repayment and before transaction fees, according to Heather Kirk, an analyst at Bank of Montreal. The sale price for the stake would be similar to what was paid four years ago, she said in a note to clients. Capitalization rates have tightened in the last eight years as demand for office assets in downtown Toronto and Vancouver has increased. A low cap rate, which is the ratio of net income to property value, suggests strong demand.
The national capitalization rate for commercial properties has dropped to about 6 percent from just under 8 percent in 2008, according to CBRE Ltd. Vancouver and Toronto have the lowest cap rates for the best quality downtown office space, starting at about 4 percent and 4.25 percent respectively, the brokerage said in its first quarter 2016 report.
The talks were first reported by Reuters.