Cross-Border Shopping

Coverage of the 2017 Investment Innovation Conference

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story_images_Towers-TopsTrends driving real estate markets are of great interest to plan sponsors, but what about the factors that continue to fuel the asset class in Canada and the U.S.?

Philip Gillin, executive vice-president and portfolio manager with Bentall Kennedy (Canada) Limited Partnership and Sun Life Investment Management suggests the strong economic growth in 2017 and gradual recovery from the financial crisis only promotes the demand for the asset class in Canada.

“Real estate is the economy with a roof on it; strong economy, strong demand for real estate,” he says, adding his optimism stems from the high levels of job creation in Canada. There are potential headwinds for Canada, however, Gillin says, like the impact of the North American Free Trade Agreement (NAFTA) negotiations on the Canadian economy and how greenhouse gas management, carbon taxes and oil use could affect the energy sector.

The U.S. real estate markets are largely driven by the economy, says Doug Kinney, executive vice-president, client relations and product development with Bentall Kennedy (U.S.) Limited Partnership, a Sun Life Investment Management company.

He says the factors that drive Canadian markets are similar to those driving real estate investments in the U.S. “Forecasts for the economy continue to grow at modest levels,” Kinney says. “A lot of job growth is in technology and innovation-led markets, and that’s also where we focus on our real estate investment strategies.”

Here in Canada, Gillin believes Canadian investors benefit from this as Canada is seen as a safe haven. “There’s been a number of international investors who have made significant capital investments in Canada,” he says. Those who really aren’t looking to get a threshold level of return — but looking more to put capital in what they perceive as a more secure market.

“We’re seeing very strong demand for investment properties in Canada and can anticipate record high transaction volumes in 2018,” Gillin says. Down south, Kinney states a lot of the capital comes from overseas due to higher interest rates relative to the rest of the world.

CAPITAL FLOWS

Kinney reflects on the spread of capital moving into the U.S., Europe and now Asia — today larger pension plans are opening offices all over the world. “They’re buying and partnering with local operating partners, and the capital outflow is amazing.”

Gillin agrees that the demand for core assets in Canada is significant, and it’s pushed capitalization rates down and driven upward pressure on pricing. But in the U.S., Kinney says depreciation is top down and so most of the return is coming from cash flow.

Other opportunities in the U.S. real estate market include industrial, especially demand for last-mile distribution centres that are being fuelled by ecommerce. Multifamily assets have also performed well, and demand remains strong although there are signs of oversupply in certain markets.

Gillin adds the mindset around home ownership is changing demographically north and south of the border and driving demand for rental housing. “From an ownership perspective, the amount of capital associated with maintaining first-generation assets is significant and depresses your return; consequently, we are focusing on the construction of new, purpose-built rentals in major markets in Canada,” he says.

Many pension plans, Kinney concludes, are beginning to move up the risk-return spectrum in search of higher returns, especially in the value-add space, as core returns begin to moderate.

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