Apartment buildings were top performers last year for institutional investors participating in the REALPAC/IPD Canada Property Index. Recently released 2016 results show an 8 per cent total return on 340 residential properties — well above the 5.7 per cent total return across the entire index, which encompasses more than 2,400 directly held standing assets in 43 portfolios.
The results reinforce reports of cap rate compression in many major Canadian markets over the past 12 months. Residential income returns of 4.3 per cent were the lowest of the four major property sectors, but apartments enjoyed the largest surge in value with 3.6 per cent capital growth.
“It’s still a very desirable asset type, but it’s not producing a lot of cash,” observed Michael Brooks, REALPAC‘s chief executive officer, as he facilitated discussion at the results presentation in Toronto earlier this month.
While real estate in general is aligned with institutional investors’ needs for stable, predictable returns over the long term, apartment fundamentals particularly match that criteria. Top strategists for index participants hailed the residential sector’s ballast qualities, especially in a year when office values declined and the Calgary and Edmonton markets suffered a loss on investment.
“Residential is always solid on the occupancy front,” noted Blair McCreadie, senior vice president and fund manager with Fiera Properties. “The multi-res space is not really a market that has had a lot of surprises.”
“You have a clear view on revenue growth,” concurred Vince Brown, president and chief executive officer of Triovest.
In a year-over-year comparison, residential properties were on par with their 2015 performance when the sector achieved a 7.9 per cent total return. Other property types dropped more off the previous year’s pace. Notably, the retail total return topped the chart at 8.8 per cent in 2015 and fell to 6 per cent in 2016; office properties registered a total return of 5.5 per cent in 2015 and dropped to 4.7 per cent in 2016.
The index producer, MSCI, pegs the total value of apartment properties in the index at $12.4 billion, equating to about 9 per cent of its total capital value. In contrast, the seven open-end funds participating in the REALPAC/IPD Canada Property Fund Index, hold a greater weighting of residential properties.
Apartments are pegged at 17.5 per cent of the capital value of the property fund index, which encompasses about 900 individual properties collectively worth about $26 billion. MSCI reports the property fund index delivered a net fund total return of 6.5 per cent last year.