“Real estate merely houses the world around us and we need to be responsive to global changes,” says Gary Whitelaw, Bentall Kennedy’s CEO
Global uncertainty, what’s happening in Europe and the slowdown in Asia is affecting real estate demand in Canada but it’s still solid.
Businesses are still making decisions, which is very good, unlike in 2009. Most of the new development opportunities that we’re seeing are the result of a tremendous focus by our users on productivity, whether that’s the consolidation of multiple office locations into a new building or new premises for operational synergies and efficiencies or whether its retailers looking for new more flexible formats and sizes that accommodate a greater emphasis on online retailing.”
Productivity is driving every real estate sector in Canada.
Large stores are shrinking and moving to on-line retailing. Industrial clients are focussing on new modern forms of distribution. People are buying homes in downtown cores to avoid long commutes. Even the new trend towards ESG — environmental, social governance and sustainability —reflects concern for productivity.
“The most sustainable and efficient buildings have lower operating costs; they have higher tenant satisfaction, higher retention and therefore ultimately higher value,” says Whitelaw.
“Canada has done well on that global dimension but I think we need to make it a priority. We will see greater differentiation over the next decade between corporations that recognize that this has become a priority and those that become functionally obsolete because they haven’t.”
Note: This article was published on p 55 of Canada’s Leading Real Estate Forum, Toronto, Winter 2012.
“It’s a good time for Canadians who are looking to diversify out of Canada,” says international real estate advisor
Investors started the year holding on to cash, out of fear about how the European financial crisis might unfold. They are beginning to spend again now, but at significantly lower levels than before the crisis.
Financiers are so cautious that even German developers with sensible projects in good locations with credit-worthy tenants under long-term leases have to scramble for equity.
In the pre-crisis, German bankers would have financed those projects at 80 to 90% of cost, whereas now they might finance 60% maybe 70%, if it’s absolutely the best-of-the-best triple A in every respect,” says Atlantic Partners Ltd. president Bradley Olsen. “That gap is a very significant gap for the developers who weren’t used to putting up that kind of equity. They’re out scrambling looking for equity sources.”
When it comes to acquisition, most foreign investors focus on major markets in Europe, says Olsen. London remains the top receiver of international capital in the office sector, followed by Paris and Munich, then Hamburg and Dusseldorf. Sweden, Norway and Finland are also receiving lots of attention in the office sector, while Poland is attracting everyone.
“Warsaw has had a pretty good run in the last twelve months,” says Olsen. “Poland is the next core market in Europe, in particular for logistics and retail, perhaps for investors too. I think it will continue to attract a lot of capital.”
The geographic and economic position of various markets in Europe are now working together to encourage foreign investment towards the north and away from the south.
“We’ve seen a huge drop-off in turnover in those southern markets but at the same time, we’ve seen very strong capital flows into the northern markets and perhaps pricing is even more aggressive than it’s been recently,” says Jonathan Hull, Managing Director of CBRE Global.
Projects with high level of vacancy in markets that are challenged in the south are finding it very difficult to achieve anything like acceptable pricing. Whereas in London, where there is relatively low supply in the market, we’re seeing premium pricing being paid for very core product. Short leases are not seen as such a bad thing in those markets where you’re seeing high levels of tenant demand in core locations.”
Meanwhile, the southern areas of Europe—including Greece, Italy, Spain and Portugal—are struggling with debt crises domestically and can’t attract capital in foreign markets because of increased risk.
“We’re seeing the austerity measures that are being taken in those countries having an impact on the leasing markets and consequently on the sentiment from investors and therefore on turnover,” says Hull. “With the softness in the occupational markets in most countries, leasing risk and vacancy are obviously very difficult to price and also very difficult to raise debt.”
Forward-looking investors like the financial resilience and increasing transparency of markets in Latin America.
Canadian investments like the big pension plans are starting to look back at Mexico as an attractive proposition given the stability it showed throughout the recent financial crisis,” Eduardo Güémez
“There are still growth opportunities in Brazil and Mexico, where we see opportunities both for development and acquisitions,” said Eduardo Güémez, a Managing Director of LaSalle Investment Management.
Mexico’s office market is extremely attractive, although it’s getting harder to find assets. “We see a more crowded market given the influx of new capital from the local pension plans who before could not invest in real estate and are now doing it actively. That gives a lot more liquidity and more exit strategies.”
Güémez also likes industrial markets in Mexico, especially over the long term. “Clearly, the industrial market will have substantial growth given the reindustrialization of the whole of North America. Given changes in natural gas pricing and the whole dynamics of that, and the latest big thrust by the US to try to bring back manufacturing—that’s going to open up a lot of opportunities.”
Investors looking for new growth markets are also beginning to consider Columbia and Peru, he says. “Columbia and Peru have similar stories to what Mexico had several years back. You have a growing middle class, more access to credit, and a more stable market for new opportunities that are maybe not as crowded as the other two countries.”