Canadian Real Estate Market Real Estate Summit 2012
Canadian Real Estate Market Real Estate Summit 2012
Agenda Why Real Estate? Canadian Real Estate Market Overview Leasing Markets Capital Markets Current Investment Strategies Key Takeaways
Why Real Estate?
Why Real Estate? Attractive Total Returns Relative to Other Asset Classes Components of Return, 15-Year History, 1997Q1 – 2011Q4 Investment Benchmark B h k
Income Yield
Capital Appreciation A i ti
Total Return
RCPI/IPD Index
7.8
3.8
11.8
DEX Long Bond Index
6.0
2.7
8.8
S&P/TSX / Composite Index
2.1
4.8
7.0
Superior returns over the last 15 years 4
Why Real Estate? Attractive Risk-Adjusted Returns Relative to Other Asset Classes
Risk-Adjusted Returns, 15-Year History, 1997Q1 – 2011Q4 Investment Benchmark B h k
Annualized R t Return
Standard Deviation D i ti
Sharpe R ti * Ratio*
Negative Q t Quarters
RCPI/IPD Index
11.8
5.52
1.68
4/60
DEX Long Bond Index
8.8
6.47
0.83
15/60
/ S&P/TSX Composite Index
7.0
19.02
0.29
21/60
*Average returns are used to estimate the measure of volatility and the risk adjusted returns, and are distinct from “annualized” returns referenced in this section.
Solid risk-adjusted performance over last 15 years 5
Why Real Estate? Asset Class Diversification Benefits Correlation Matrix, 1975Q1 – 2011Q4 Investment Benchmark
RCPI/IPD Index
DEX Long Bond Index
S&P/TSX Composite Composite Index
RCPI/IPD Index
1.00
‐0.12
0.03
DEX Long Bond Index
‐
1.00
0.27
S&P/TSX Composite Index
‐
‐
1.00
Low correlation enables Real Estate to provide diversification benefits 6
Why Real Estate? Current Institutional and Pension Fund Views
“… it’s really a value play” Bob Bertram, Ontario Teachers “…investments that will add value to the fund over the long term … with a predictable, enhanced rate of return” Dale Richmond, OMERS “…quality real estate investments are a good hedge against inflation” Claude Lamoureux, Ontario Teachers “…real estate generates a steady income stream that can be used for ongoing pension payments” OP Trust 7
Canadian Real Estate Market Overview
Canadian Real Estate Market Overview Major Canadian Centres
EDMONTON VANCOUVER VICTORIA
CALGARY REGINA WINNIPEG
Scale of Bubbles Based on Population or Employment of the Centres
MONTREAL OTTAWA
HALIFAX
TORONTO
9
Canadian Real Estate Market Overview Leasing Markets
Canadian office markets smaller but still significant 10
Canadian Real Estate Market Overview Leasing Markets
Toronto and Montreal are among the largest industrial markets 11
Canadian Real Estate Market Overview Leasing Markets
Low vacancy levels driving new construction projects & rent growth continues
12
Canadian Real Estate Market Overview Leasing Markets
Vacancy levels remain tight & rents at cycle peak
13
Canadian Real Estate Market Overview Capital Markets
Investment volumes have averaged $19.3B over last 11 years 14
Canadian Real Estate Market Overview Capital Markets
Cap rates at cyclical lows, but still at attractive spread over bonds 15
Canadian Real Estate Market Overview Capital Markets
Index is income driven – average return since inception is 9.6% of which 7.9% is income 16
Canadian Real Estate Market Overview Capital Markets
Apartment - $170M Retail - $164M Industrial - $138M Office - $96M
Achieve annualized returns of 9 - 11% 17
Current Investment Strategies
Current Investment Strategies Strategic Allocation Process Investment allocation by geographic market (Canada vs US) Investment allocation to Core vs Value-Add Investment Guidelines
Canada
Core
** %
Value Add
** %
USA ** %
** %
19
Current Investment Strategies Economic Outlook Slower economic growth globally US growth to outpace Canada Continued low interest rates over near term subject to: Risks of European debt default Unexpectedly strong economic recovery Canadian real estate approaching cyclical peak US real estate poised for recovery
20
Current Investment Strategies Canada vs USA Growth – Outlook Stronger in US in 2012
21
Current Investment Strategies Canada vs USA Cap Rate Spreads
Canadian cap rates: 5 5.25% 25% - 6% (except Industrial) Return to 2007 peak
US Yield Spreads Cap Rates vs. 10-Year US Treasury
US Cap Rates: 6.75% - 7.5% (except Residential) Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11
10.0 9.0 8.0 7.0 60 6.0 % 5.0 4.0 3.0 2.0 1.0
10-Year US Treasuries Retail-Regional Apartment
Office-CBD Industrial-Warehouse
Source: Price Waterhouse Coopers
22
50 bps above 2007 peak
Current Investment Strategies Conclusions Canada vs. US Overweight new investment in US versus Canada Core vs. Value Add Canada - “Barbell” Approach Buy core quality and play spread over long financing rates Undertake higher risk/higher return development US Buy core to take advantage of attractive returns in quality assets Consider Value Add to enhance returns
23
Case Study I – Development Bramalea City Centre (Canada) 2006
Stabilized
GLA (‘000’s sf)
1,221
1,478
NOI
$22.8
$38.1
Cap Rate
6.57%
5.75%
Market Value
$331
$662
Debt
$100
$259
Net Asset Value
$231
$401
Development Cost
$183
Incremental NOI
$15.3 8.4% 8 4% ((on DC)
Capital Appreciation
$148 28.8% (on OMV + DC)
24
Case Study II – Acquisition Boynton Town Centre (US)
GLA (‘000’s sf)
224
NOI
$4.5
Purchase Price
$59
Debt
$38 (at 5%)
Net Asset Value
$21
ROI (Cap Rate)
7.6%
ROE
12.4% 25
Key Takeaways Real estate is an attractive investment because of its competitive returns, low volatility and diversification benefits Leasing g market fundamentals ((rents and vacancyy rates)) remain healthy in Canada Real estate capital markets are active, but pricing is approaching cyclical highs in Canada Attractive “core” investments are available in Canada financed by low-cost debt Higher risk/higher return opportunities are available in the more volatile US markets
26
Agenda Why Real Estate? Canadian Real Estate Market Overview Leasing Markets Capital Markets Current Investment Strategies Key Takeaways
Why Real Estate?
Why Real Estate? Attractive Total Returns Relative to Other Asset Classes Components of Return, 15-Year History, 1997Q1 – 2011Q4 Investment Benchmark B h k
Income Yield
Capital Appreciation A i ti
Total Return
RCPI/IPD Index
7.8
3.8
11.8
DEX Long Bond Index
6.0
2.7
8.8
S&P/TSX / Composite Index
2.1
4.8
7.0
Superior returns over the last 15 years 4
Why Real Estate? Attractive Risk-Adjusted Returns Relative to Other Asset Classes
Risk-Adjusted Returns, 15-Year History, 1997Q1 – 2011Q4 Investment Benchmark B h k
Annualized R t Return
Standard Deviation D i ti
Sharpe R ti * Ratio*
Negative Q t Quarters
RCPI/IPD Index
11.8
5.52
1.68
4/60
DEX Long Bond Index
8.8
6.47
0.83
15/60
/ S&P/TSX Composite Index
7.0
19.02
0.29
21/60
*Average returns are used to estimate the measure of volatility and the risk adjusted returns, and are distinct from “annualized” returns referenced in this section.
Solid risk-adjusted performance over last 15 years 5
Why Real Estate? Asset Class Diversification Benefits Correlation Matrix, 1975Q1 – 2011Q4 Investment Benchmark
RCPI/IPD Index
DEX Long Bond Index
S&P/TSX Composite Composite Index
RCPI/IPD Index
1.00
‐0.12
0.03
DEX Long Bond Index
‐
1.00
0.27
S&P/TSX Composite Index
‐
‐
1.00
Low correlation enables Real Estate to provide diversification benefits 6
Why Real Estate? Current Institutional and Pension Fund Views
“… it’s really a value play” Bob Bertram, Ontario Teachers “…investments that will add value to the fund over the long term … with a predictable, enhanced rate of return” Dale Richmond, OMERS “…quality real estate investments are a good hedge against inflation” Claude Lamoureux, Ontario Teachers “…real estate generates a steady income stream that can be used for ongoing pension payments” OP Trust 7
Canadian Real Estate Market Overview
Canadian Real Estate Market Overview Major Canadian Centres
EDMONTON VANCOUVER VICTORIA
CALGARY REGINA WINNIPEG
Scale of Bubbles Based on Population or Employment of the Centres
MONTREAL OTTAWA
HALIFAX
TORONTO
9
Canadian Real Estate Market Overview Leasing Markets
Canadian office markets smaller but still significant 10
Canadian Real Estate Market Overview Leasing Markets
Toronto and Montreal are among the largest industrial markets 11
Canadian Real Estate Market Overview Leasing Markets
Low vacancy levels driving new construction projects & rent growth continues
12
Canadian Real Estate Market Overview Leasing Markets
Vacancy levels remain tight & rents at cycle peak
13
Canadian Real Estate Market Overview Capital Markets
Investment volumes have averaged $19.3B over last 11 years 14
Canadian Real Estate Market Overview Capital Markets
Cap rates at cyclical lows, but still at attractive spread over bonds 15
Canadian Real Estate Market Overview Capital Markets
Index is income driven – average return since inception is 9.6% of which 7.9% is income 16
Canadian Real Estate Market Overview Capital Markets
Apartment - $170M Retail - $164M Industrial - $138M Office - $96M
Achieve annualized returns of 9 - 11% 17
Current Investment Strategies
Current Investment Strategies Strategic Allocation Process Investment allocation by geographic market (Canada vs US) Investment allocation to Core vs Value-Add Investment Guidelines
Canada
Core
** %
Value Add
** %
USA ** %
** %
19
Current Investment Strategies Economic Outlook Slower economic growth globally US growth to outpace Canada Continued low interest rates over near term subject to: Risks of European debt default Unexpectedly strong economic recovery Canadian real estate approaching cyclical peak US real estate poised for recovery
20
Current Investment Strategies Canada vs USA Growth – Outlook Stronger in US in 2012
21
Current Investment Strategies Canada vs USA Cap Rate Spreads
Canadian cap rates: 5 5.25% 25% - 6% (except Industrial) Return to 2007 peak
US Yield Spreads Cap Rates vs. 10-Year US Treasury
US Cap Rates: 6.75% - 7.5% (except Residential) Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11
10.0 9.0 8.0 7.0 60 6.0 % 5.0 4.0 3.0 2.0 1.0
10-Year US Treasuries Retail-Regional Apartment
Office-CBD Industrial-Warehouse
Source: Price Waterhouse Coopers
22
50 bps above 2007 peak
Current Investment Strategies Conclusions Canada vs. US Overweight new investment in US versus Canada Core vs. Value Add Canada - “Barbell” Approach Buy core quality and play spread over long financing rates Undertake higher risk/higher return development US Buy core to take advantage of attractive returns in quality assets Consider Value Add to enhance returns
23
Case Study I – Development Bramalea City Centre (Canada) 2006
Stabilized
GLA (‘000’s sf)
1,221
1,478
NOI
$22.8
$38.1
Cap Rate
6.57%
5.75%
Market Value
$331
$662
Debt
$100
$259
Net Asset Value
$231
$401
Development Cost
$183
Incremental NOI
$15.3 8.4% 8 4% ((on DC)
Capital Appreciation
$148 28.8% (on OMV + DC)
24
Case Study II – Acquisition Boynton Town Centre (US)
GLA (‘000’s sf)
224
NOI
$4.5
Purchase Price
$59
Debt
$38 (at 5%)
Net Asset Value
$21
ROI (Cap Rate)
7.6%
ROE
12.4% 25
Key Takeaways Real estate is an attractive investment because of its competitive returns, low volatility and diversification benefits Leasing g market fundamentals ((rents and vacancyy rates)) remain healthy in Canada Real estate capital markets are active, but pricing is approaching cyclical highs in Canada Attractive “core” investments are available in Canada financed by low-cost debt Higher risk/higher return opportunities are available in the more volatile US markets
26
