Bullish Real Estate Investors are Pushing Expected Yields to New threshold

The shortage of investment products on the real estate investment market is even more glaring this quarter. Deep pools of equity, both domestic and international, are actively bidding for choice assets and could potentially lead to further compression on rates for best opportunities. While more investors want to take advantage of historically low interest rates, property owners are clinging tightly to their real estate assets for lack of better opportunities to invest the proceeds of a sale, aggravating the imbalance between supply and demand.

Altus InSite’s Q3 Investment Trends Survey results confirm high levels of investor confidence and motivation to buy. With Pension Funds, Life Companies and REITS awash with cash and private investors having access again to low cost mortgage money, causing multiple bids in all asset classes. As a result, in the last three quarters, reported yields for most asset classes have decreased to within 10 bps to 30 bps of those experienced in the last cycle, which peaked in late 2007.

Between Q2 and Q3 2011, OCRs remained stable for the most part in all sectors. The range of opinion of rates has remained relatively consistent from 5.0% to 8.0% for most regions. A notable decrease in rates was observed in Suburban Multiple Unit Residential sector in most locations. Multiple Unit Residential Apartments remains one of the most stable property investment types and usually produces the lowest yield rates in our survey. The reported yield in terms of OCRs for Suburban Multi Residential ranges from a low of 4.0% in Vancouver to a high of 7.0% in Halifax.

In terms of yield requirements, the OCRs for Single-Tenant Industrial continue to exhibit either stability or compression in rates across nearly all markets from the previous quarter. Rates at the upper end (8.5% to 8.8%) are observed in Montreal, Quebec City, and Halifax.

Property Preferences

There has been a dramatic repositioning of property type demand in the third quarter of 2011. The current quarter results suggest that Tier 1 Regional Mall and Retail sector in general has again become the “Flavor of the quarter” among investors. The others in the Top 5 positions include Multi-tenant Residential, Downtown Class “AA” office, Suburban Multi Unit Residential and Single Tenant Industrial. Office products overall have seen positive momentum ratio change, which suggests that demand for this sector remains high. An interesting observation is that Suburban Class “B” Office has elevated to third last position from last in Q2, as market fundamentals for this asset class are slowly improving. It will be interesting to see if this rise continues in to the next quarter.


Debt Outlook
Another positive sentiment is noted with regard to anticipated interest rate impact. The chart on the right shows the Cost of Debt Outlook for the next three months. The majority of respondents anticipated “no change”, and this response increased by 58% from the previous quarter. There still remains a cautious outlook among some investors about cost of debt “increasing”, however the response rate for this category declined by about 27%. Generally the investment trends survey suggests a balanced view of interest rate risk: neither overly optimistic nor too pessimistic.

More Stability to Come
It remains to be seen if this growth can continue or will stabilize in upcoming quarters given the ongoing dismal news of poor economic performance in USA and Debt Crisis in Europe, and its anticipated consequences in the Canadian market. On a positive note, given Canada’s strong economic engine in comparison to global markets, there is a possibility of more foreign funds investing in our market that would lead to further compression on rates. Stay tuned for this update in our annual year end survey next quarter.

Every quarter, senior Altus Group professionals reach out to over 300 investors, managers, owners, lenders, analysts and other market stakeholders to survey their opinion on value trends and perspectives. Conducted with the same benchmark properties for over 10 years, the survey provides valuable insights on valuation parameters for 32 asset classes in Canada’s 8 largest markets. For more detailed survey results, please contact support@altusinsite.com.

on November 3, 2011