Volatile stock markets and minuscule returns from fixed income have investors looking at global real estate. But rather than single-family residential property, the hot ticket these days is multiple-family dwellings.
At a luncheon for financial analysts with the Edmonton CFA Society, Eric Bonnor, senior vice-president with Brookfield Asset Management in Toronto, quoted from the publication Emerging Trends in Real Estate 2012, a survey of 950 real estate executives by the accounting firm PricewaterhouseCoopers and the Urban Land Institute.
“Canadian real estate remains the most stable in North America,” Bonner said. “Canadian investors fed up with disappointing stocks and low-yielding bonds sit on lots of funds, looking for long-term cash flowing assets like real estate, and are having trouble placing the funds that they have. Investors condition themselves to accept lower domestic returns, or go outside the country and chase higher yields.”
The booklet lists Toronto and Vancouver as the most attractive real estate markets in Canada, being 24-hour destination points for businessmen and other visitors. Calgary is rated third and Edmonton fourth.
It is written that Edmonton and Calgary are oilsands markets, but Edmonton “quietly prospers in less of a see-saw mode, historically cushioned by the presence of the provincial government.” And the commercial tenancies differ, in that Edmonton features “more stable engineering companies and not so many wildcatters.”
The research adds that Edmonton has a tight industrial real estate market with low vacancy rates, that retail building is strong as people “earn big bucks in the oilsands country and spend in local malls and power centres, including one of the world’s largest in west Edmonton.” Homebuilders do well due to appetites from people with ample salaries. And local governments hike development assessments because “it’s good political optics versus raising property taxes.”
But there are problems with residential real estate in North America. The S&P Case-Shiller index shows house prices in 20 American cities are down 3.8 per cent in the 12 months ending Aug. 31, and have fallen 31 per cent since their 2006 peak. With three or four years of unsold inventory in the country, there are no signs of immediate reversal in prices. In Canada, there are concerns that a housing bubble in certain parts of the country could cause homes in those areas to fall 20 per cent in value.
To avoid the risk of buying additional residential homes, people are looking at investing in commercial and industrial properties. And presenters at the luncheon said multiple-family dwellings have become treasures, filled by people leaving their homes because they can’t keep up mortgage payments, plus those unable to afford buying a house in the first place.
Seamus Foran, a senior vice-president with Brookfield Asset Management, said the U.S. real estate market has $180 billion of known distressed assets, and that “the shining star for U.S. real estate today has been the multi-family market; as U.S. home ownership continues to decline, the multi-family market has been there to reap the benefits. However we need to be cautious as new development has started in this sector.”
He noted that in most U.S. apartment buildings, the turnover ratio of tenants on a year-to-year basis is at least 50 per cent, considerably higher than in Canada.
“There’s a reluctance to make a long-term commitment to buy residential houses (in the U.S.),” Foran said. “And the multi-family market really benefits from short-term leases, because it gives the owners opportunities to bring rents up, each time those leases fold.”
As for Canada, the Emerging Trends booklet says:
“The multi-family residential sector will stay tight as continuing immigrant flows sustain demand in the major cities. Even if job growth declines and homebuying cools, apartments should be ‘a safe haven.’ When people have less, they rent.
An increasing number of younger adults delay buying houses; they simply cannot afford them after recent price spikes. Aging demographics also favour more apartment demand; empty nesters and seniors move out of suburban homes into smaller, easier-to-maintain units with urban conveniences.”
In summary: “Investors can never get their hands on enough apartments. And everybody has the same idea. When you get some, hold onto them.”
Bonnor said the four ways of investing in real estate – direct, private, public and ‘other’ – differ in liquidity, diversification and fees.
Most retail investors looking at public investing do so through real estate investment trusts (REITs) or exchange-traded funds (ETFs), with “lots of liquidity, but very high volatility.”
Foran added that there are two factors in real estate investing unique to Canada versus the U.S. One is that based on size, either square footage or asset value, the vast majority of Canadian properties are owned by institutional owners – very well capitalized REITs, very well capitalized companies like Brookfield, or pension funds that have little to no debt on their portfolios. A second difference is that Canadian banks don’t have near the same levels of commercial real estate debt leverage.
David Glicksman, a partner with PwC, said that foreign investors in U.S. property should be aware of whether they have to file U.S. income tax returns, or whether it’s done through a firm or fund. They also need to know how to declare income or losses on their Canadian tax returns, if there are withholding taxes, if there are U.S. taxes on the sale of the investment, and whether you get a foreign tax credit in Canada.
Steve Williams, also with PwC, said that in 1980 the U.S. Congress implemented the Foreign Investment in Real Property Tax Act. It means that if a foreign investor owns U.S. real estate directly or through a U.S. company whose underlying asset is real estate, you should make U.S. tax plans for the sale of the investment.
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