Saturday, April 08, 2006

Development 'WAVE' Hits Real Estate

A "mini development wave" is taking hold in the commercial real estate market as high prices and an abundance of capital are turning investors into builders and private owners into sellers, says a leading executive in the industry.

As prices continue to rise across the country and the competition for existing buildings becomes more fierce, an increasing number of institutional investors are teaming up with private partners on construction projects, said Blake Hutcheson, Canadian president of CB Richard Ellis. At the same time, many private owners are taking advantage of the rising market to sell at least some of their holdings, he said.

"We are at the point that it may not be a bad time to take some money off the table," Mr. Hutcheson said yesterday at the RealCapital conference in Toronto, which focuses on investment in the industry. The coming year will likely see an increase in privately held portfolios coming on to the market, he predicted during his firm's annual forecast presentation.

He also predicted increased merger and acquisition activity this year and said he anticipates some institutional investors will sell parts of their holdings in order to reinvest their gains in areas where they can get a higher return, perhaps in foreign markets. They also may put some of those gains into new construction.

"Watch for a mini development wave across all sectors," Mr. Hutcheson said, noting that higher downtown office rents in markets such as Calgary and Toronto have made new construction in this sector a real option for the first time in several years.

Even with new supply, Mr. Hutcheson expects rents to rise in most sectors and prices to continue to climb. These favourable conditions also will lead to an increase in the value of properties trading hands, he said.

A string of blockbuster deals, such as the sale of the O&Y portfolio, pushed the value of commercial real estate transactions up to almost $20-billion in 2005 from $16.8-billion in 2004. That activity should rise even further this year, Mr. Hutcheson said. "We are going to see some major deals."

That kind of activity would be welcome by many speakers at yesterday's conference who identified the lack of available product as a major issue in the Canadian market.

"There is a perception that the highest-quality real estate in Canada is locked up for good by Canadian institutions," said Amy Erixon, who runs the North American operations of industrial developer Giffels Management Ltd. and is based in the United States

The head of North American investment for a major German fund agreed. "The industry is very centralized," said Christian Strauch of KGAL Group. "It does not take long to know everybody because there are just a handful of people."

In order to get more access to prime assets, some Canadian institutional players are backing development projects. Josephine Marks, chief investment officer for the Hospitals of Ontario Pension fund, told the conference that their cautious entry into development has paid off. "We have a building that's fully leased and it's still a hole in the ground," she said. (The fund is a partner in one of the new office projects in Calgary.)

Despite rising prices, the Canadian real estate market continues to offer investors attractive returns. New figures released this week by the Canadian Institute of Canadian Real Estate Investment Managers show that total return on real estate in 2005 was 18.7 per cent, up from 13 per cent in 2004.

Retail remained the strongest-performing sector with a total return of 21.4 per cent.

Returns on office properties showed the biggest gains, almost doubling to 18 per cent. The hottest markets were Calgary with a 26.5-per-cent return and Edmonton with 23.4 per cent.


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