Foreigners Set to Buy Record Commercial Real Estate in Canadaby
Low dollar to spur purchases as investors seek safety
`Currency absolutely is the icing on the cake," CBRE says
Foreign investors will account for a record amount of commercial-property purchases in Canada this year, spurred by a weak currency, according to a forecast from the world’s largest real-estate services firm.
Acquisitions by international investors in 2016 will surpass the previous record in 2007, when 7.5 percent of all deals over C$10 million ($7 million) were from foreign buyers and C$32.2 billion in commercial real estate traded hands in Canada, according to data compiled by CBRE Group Inc.
This year, CBRE forecasts C$23.6 billion in total deals, with foreign buyers set to spend a record amount as they search for stability in volatile global markets. Foreign buyers made up 5.4 percent of large transactions in 2015, the highest since 2007. There were C$23.8 billion of deals in 2015.
"Foreign capital should be very active in Vancouver, very active in Toronto this year and currency absolutely is the icing on the cake," Mark Renzoni, chief executive officer of CBRE in Canada, said in an interview at Bloomberg’s Toronto headquarters. "It’s really starting to feel like this is giving us a competitive advantage we didn’t expect."
One deal has already set the tone for 2016. German billionaire Klaus-Michael Kuehne, majority owner of the world’s largest sea-freight forwarder, made an unconditional offer for the Royal Center in downtown Vancouver, a 36-story office tower with retail and parking owned by Brookfield Canada Office Properties, according to people familiar with the transaction.
The C$425 million deal, or C$725 a square foot for the office component, sold at a near-record low capitalization rate as the price was several millions of dollars higher than local bidders, the people said. A low cap rate, which is the ratio of net income to property value, suggests strong demand.
A spokesman for Brookfield declined to comment on a deal. Phone calls and e-mails to Kuehne & Nagel representatives outside of regular business hours weren’t returned.
It’s not the first time foreign investors have had to pay more to break into the tight-knit group of pension funds, insurers, private equity, and real-estate investment trusts that own commercial property in Canada. Anbang Insurance Group Co. purchased an office tower in Toronto last year for about C$110 million, outbidding two local real estate giants: GWL Realty Advisors and Bentall Kennedy Group, sources close to the deal have said.
For outside buyers, the premium is worth it. Canada’s currency dropped 13 percent against the U.S. dollar in the last 12 months as tumbling oil prices weigh on the economy, weakening more than the Chinese Renminbi, which declined 6 percent against the greenback in the same period.
Foreign investors are more concerned about having a safe place to hold their capital for the long term than with the short-term challenges facing the markets including rising vacancies, according to CBRE.
Vancouver’s downtown office vacancy rate is set to rise to about 10 percent this year from 6.8 percent in 2014, while in Toronto the vacancy rate will tick up to 7.1 percent in 2016 from 6 percent this year, according to the brokerage’s forecast report.
"Vancouver, Toronto, which are insulated to a certain extent from this commodity carnage, are seen as markets unto themselves," Paul Morassutti, CBRE Canada’s head of valuation and advisory services, said. "Vancouver is right up there with London and Manhattan as the most desirable and safe market in the world."