From shopping centers in Germany, to industrial warehouses in Mexico and multifamily properties in the United States, Canadians have no fear crossing borders to place their commercial real estate investments in strategic locations around the globe. In fact, Canadian offshore investment accounted for a massive one-fifth of all global cross-border investment activity, totalling nearly $10 billion in 2013. But the country’s prolific outbound activity does not translate inward. According to JLL’s report titled, “The Canadian Quartet—Playing on the World Stage” released at the Urban Land Institute’s Spring Meeting in Vancouver, British Columbia, this door only swings one way: out.
Since 2007, only 10 percent on average of all transactions in Canada have involved foreign groups. In 2012, that number sank to just one percent, recovering somewhat in 2013 to be nine percent of all transactional activity. With one of the world’s highest rates of return, it can be a frustrating missed opportunity for foreign investors.There’s no doubt the global investment community has been stymied when it comes to finding that crack in Canada’s armor,” said Lucy Fletcher, Vice President of JLL’s International Capital Group in Canada. “Look at Australia—a very similar market to Canada—inbound investment there regularly exceeds 30 percent. But is the lack of foreign investment holding Canada back? Perhaps this could be true when it comes to liquidity especially when you consider how tightly held the Canadian Quartet downtown metros are by the domestic institutional investors, a market dynamic unlikely to change in the near term. Foreign investors are also an excellent source of new concepts, tenants and global best practices.”
Global Leader in Cross-Border Capital
Canadians have no reservations when it comes to outbound investments, however. Canadian investors have been at the vanguard of the expansion of cross-border real estate investment in recent years, helping to drive significant transaction activity in major cities from Sydney to New York. Canada’s pension system, which was overhauled a decade ago, has revolutionized and accelerated the amount of capital available for real estate investment. The top 10 Canadian pension funds now control over C$800 billion (US$713 billion), with a higher than average allocation to direct real estate. Canadian REITs are also some of the most active investors around the globe.
“The Canadians have a very unique approach to foreign investments that seeks to match their abundant capital with local experts. A good example is what Oxford Properties has done with Related Companies on their Hudson Yards redevelopment in New York, where they just broke ground last month,” said David Green-Morgan, JLL’s Director of Global Capital Markets. “This allows more money to flow out of the country and enables them to work with best-in-class property and asset managers. As competition for the most prime assets continues to grow, this pragmatic approach should bode well for Canadians in the years to come.”
Keeping up with the Canadians
Back on Canadian soil, the cash available for real estate investment is growing at a significantly more rapid pace than the construction of properties. It’s a dilemma that will trouble both Canadian and foreign investors as they seek ways to deploy ever-increasing capital allocations for commercial real estate. According to the Urban Land Institute’s Emerging Trends in Real Estate 2014, many feel the year ahead will bring a good number of transactions, but volumes will likely be down from last year—making it a “good year to reposition portfolios, selling assets that may not be in line with current investment objectives.”
“Especially since the returns are so strong, the interest in what has previously been known as ‘America’s attic’ is huge. But clearing out the cobwebs will require inventive new approaches.Perhaps some of the new strategic partnerships we are seeing formed by the Canadian Pension Funds offshore will translate into innovations at home or the introduction of a foreign partnership model in Canada on a more significant institutional basis as we have seen in London and Sydney,” concluded Fletcher.
[Video]: View a live update on what the investment community had to say on foreign investment in Canada
Read the full report, “The Canadian Quartet—Playing on the World Stage”