Real Estate

Money pours into real estate ETFs

‘Canadians are buying everywhere’

Investors are putting money into real estate companies outside the U.S. at a record pace as interest rates recede, economies expand and opportunities remain to buy assets at discounts amid lingering distress from the global financial crisis.

The SPDR Dow Jones International Real Estate Exchange– Traded Fund, the largest ETF for non-U.S. real estate, attracted net inflows of $304-million in August, the most of any property ETF, driving its shares outstanding – a proxy for demand – to a record, according to data compiled by Bloomberg. Last month’s surge catapulted property ahead of energy for the first time in industry fund flows year to date, the data show. ETFs are passively managed funds that aim to replicate the performance of benchmark indexes for various industry groups.

Real estate has emerged as the asset of choice following the global financial meltdown because of its relatively high yields. While the U.S. has claimed a large share of interest for its perceived stability and enduring appeal of gateway markets such as New York and Los Angeles, investors also have increased purchases in Europe, Asia-Pacific and Latin America.

“Many investors that have moved to have real estate allocations in the U.S. are now looking to do so internationally,” said David Mazza, head of ETF investment strategy at State Street Global Advisors. “Investors are looking ahead to greater cyclical recovery and taking advantage of some pockets of distress” outside the U.S.


Japan, U.K.
Japan has the largest weighting in the SPDR Dow Jones International Real Estate ETF, at 21 per cent, followed by the U.K. at 14.1 per cent, Australia at 13.6 per cent, Hong Kong at 10.5 per cent, Canada at 10 per cent, France at 9.2 per cent and Singapore at 7.7 per cent. The Netherlands, Switzerland and South Africa round out the top 10.

A Bloomberg index of U.S. real estate investment trusts fell 2.3 per cent in the fourth quarter amid concern the prolonged period of suppressed interest rates would cease, then rallied 21 per cent this year as the yield on the 10-year Treasury note fell to 2.3 per cent from 3 per cent at the end of 2013. That meant borrowing costs would stay low for the time being.

Whether it’s private-equity firms and foreign pensions flush with cash chasing commercial and housing distress in Europe and Australia and economic growth in South America, or Russian billionaires and wealthy Chinese buying homes in London, Canada and the U.S., cross-border real estate flows are increasing.

GIC, Manulife Singapore’s GIC Pte Ltd., barred from investing in Singapore itself, bought a half stake in London’s Broadgate office complex last year for more than 1.7 billion pounds ($2.8-billion), a record for a central London property.

In June, Citigroup Inc. paid a record HK$5.4-billion ($697-million) for a Hong Kong office tower that will bring most of its 5,000 employees under one roof. Canada’s Manulife Financial Corp. last year paid HK$4.5-billion for a similar-size tower and development in the city’s Kowloon district.

“Canadians are buying everywhere,” said Ross Moore, director of Canada research at CBRE Group Inc., the biggest commercial broker. “They are shopping the world. What’s happened in the last five to 10 years is the big pension funds pretty well own everything of quality in Canada. They love real estate and have all this money coming in and they have to put it somewhere.”

Toronto-based Brookfield Asset Management Inc. has started investing in European warehouse properties and Indian offices after accumulating the biggest holdings of office buildings in both the U.S. and Canada. The real estate unit of Ontario Teachers’ Pension Plan has been investing in Brazil as well as the U.K. and Australia. Canadian Pension Plan Investment Board has bought London residential, retail and office properties.

Easy targets
Markets such as the U.K. and Australia are easy targets for North American investors, Moore said.

“The ownership structures are familiar, the legal structures are very similar, they understand what they’re getting into and the transparency is good,” he said.

In Japan, where interest rates are near zero thanks to central bank stimulus, investors can borrow cheaply to buy buildings whose rents translate into an investment yield that’s three or more percentage points higher, said Sonny Kalsi, co– founder of GreenOak Real Estate, who previously led Morgan Stanley’s real estate investment unit.

Investment yields on properties are measured in terms of capitalization rate, a building’s net operating income divided by purchase price. A property valued at $100-million with income of $5-million a year would translate to a cap rate of 5 per cent.

Liquidity, stability
“Liquidity, stability and the view that rents have a lot of upside” are driving real estate investment in Japan, said Kalsi. “You can buy for a 4 to 6 per cent cap rate, and borrow at 1 to 2 per cent so there’s significant positive spread with real potential upside.”

By company, the international property ETF’s biggest holdings are Mitsui Fudosan Co., Japan’s second-largest developer; Brookfield Asset Management; Paris-based Unibail– Rodamco SE, the biggest developer in Europe; Scentre Group, the Westfield Group spinoff that owns shopping malls in Australia and New Zealand; and Land Securities Group Plc, the largest developer in the U.K.

ETF Gains
The SPDR International Real Estate ETF had a record 117.8 million shares outstanding as of Aug. 29 – a proxy for fund flows since more shares are created to meet demand – up from 400,000 shares when the fund was formed in December 2006. The ETF has gained 10.3 per cent year to date with dividends reinvested, compared with 9.8 per cent for the Standard & Poor’s 500 Index, the U.S. equity benchmark gauge.

Also paving the way for more real estate deals are the early stages of a rebound in the commercial mortgage-backed securities market in Europe and new REIT legislation in India.

Some investors say the heightened liquidity is a warning sign. Hyper-liquidity in 2007 was a prelude to the real estate crash, as the flood of debt made available through the CMBS market encouraged borrowers to pay ever higher prices.

Additionally, overbuilding in China on the residential and commercial side have kept some investors wary of putting money in Chinese properties.

“Asia’s tough,” said Moore. “You think everybody should go there but that’s also where a lot of the construction is occurring. No sooner do you buy something than a new building competing for your tenants goes up.”

Real estate companies’ earnings are rising faster than interest rates and as long as that remains the case, demand and asset values will likely hold up, said State Street’s Mazza.

“If we get to a place where leverage because of the excess liquidity is increasing faster than revenue growth and earnings, that is a sign there is some overheating,” he said. “We don’t see that at present.”


10 Must-Know High-Yield Canadian Real Estate Stocks

(1) Northern Property Real Estate Investment Trust (TSE:NPR.UN.CA) — 5.3% YIELD

Northern Property Real Estate Investment Trust is an unincorporated open-ended real estate investment trust that manages and owns a portfolio of residential and commercial income producing properties. NorSerCo’s operates execusuite hotel properties and real estate-related services. The Trust’s residential properties are comprised of three components: apartments, townhomes and single family rental units; execusuite apartment rental units; and seniors’ properties. The Trust’s commercial properties are comprised of office, industrial and retail properties in areas where it has residential operations. As of Dec 31 2010, Co. owned 8,419 residential units and 903,352 sq. ft. of commercial space.




Real Estate: Investors Turning to Small Property Development

084e87a704762fed2247732a795060ad LLimited supply and high prices in key markets is encouraging landlords to embrace the role of small property developer. But are the big profits worth the hard work?

An increasing number of investors are turning their attention to property development in a bid to maximize on the demand for single-family homes.

Speaking to CREW, investor Sahil Jaggi says buying an old building and undertaking a complete rehab is the only way he can get into desirable neighbourhoods at a good price, and opportunity to make a lot of cash.

While admitting that the work is a full-time job with the risk of unexpected costs popping up, Jaggi says joint-ventures are the best way to get into such projects.

“If you have a good plan, good location and a good project lined up you will always find investors,” he says. 

“If 20 to 30 per cent of the area is already developed, you know it’s headed towards something and there’s room for growth.”

Paul Shikanai, owner of Regency Property Management and Real Estate in Regina, advises investors to be financially creative when undertaking such projects and do not undertake any unnecessary costs.

“I’ve seen people put a lot of money into it and it’s hard to get that return,” he says. “You don’t need to put in a granite countertop. You don’t need a beautiful tile on the floor.”

Daily Market Update

Written by  Steve Randall

At last some data on foreign investors… Calgary condo sales boom… And students hit by rentals shortage…

9217346f41a5b7e8e45bd1d2bf97a850 LChinese connection to Vancouver housing

A real estate company in Vancouver has provided a snapshot that much of the available data does not. Macdonald Realty says that more than a third of the buyers of single-family detached homes that it sold last year have a connection to mainland China. The company says that those purchasers paid more money for their homes too, paying over $2 million compared to the $1.4m average. Dan Scarrow from the company says that despite the large volumes of buyers and cash from China, he has not seen much evidence of the controversial practice of overseas investors buying, but not residing here. There are many realtors who are already, or are planning to, actively target overseas investors, especially the Chinese. Some have opened offices in China or undertake marketing initiatives to attract buyers from the country. Read the full story.

Condo resales booming in Calgary

Condos are king in Calgary with sales up 20 per cent year over year and no sign of that abating. Linda Lam of Sotherby’s International says that people like the condo lifestyle; the convenience, location, security and amenities. She says that the city is popular and the relative affordability of condos in Calgary compared to some other markets is driving demand. Ann-Marie Lurie CREB says that with the rental market being so tight many are realising that they can afford to buy. Resales and sales of new condos and townhouse condos are trending up and construction in the sector is working hard to keep pace. Read the full story.

Students seek housing solutions

They’re about to head back to school and for many first year university students the accommodation choice is easy; the dorms. For those heading back to college though they are often seeking a bit of independence and that is presenting challenges in many areas. The rental markets are tight in a lot of our major cities and many students are finding that they can’t find anywhere affordable to live. For those who rented last year, the leases may be ending and not being renewed at the same rates. An option for some families is for mom and dad to buy an investment property. Their kids get to use it while studying and in three or four years’ time they can sell or put it on the rental market.Read the full story.

Construction obstruction

There’s a lot of pressure to get started in those building projects and sometimes things get overlooked. On one Toronto street corner pedestrians have been wondering where the crossing signal and timer has gone. It’s still there actually, but obscured by a construction hoarding for a new condo development. Read the full story.


***Do you want to learn more about small property development? The September issue of Canadian Real Estate Wealth features a comprehensive step-by-step guide of what is involved in small property development. Investors reveal the secrets to successfully undertaking such projects, while city planners and lawyers offer exclusive advice on how to avoid unnecessary costs and headaches. The magazine will be on newsstands this week or subscribehere to avail of a special deal today.