Toronto and Calgary are plotted in the peaking quadrant of Investment Property Databank’s (IPD) recently released matrix of 65 global cities. Nevertheless, they are also in the vast majority of world centres that recorded a downward-trending performance in 2012, as overall real estate returns generally declined from 2011 levels in Canada and other world markets.
Calgary topped the 2012 global rankings – based on IPD’s databank of 77,000 individual assets worldwide, valued at $1.9 trillion US – with total returns of 19 per cent. This obviously replicates its top position in Canada reported in the REALpac/IPD Canada Annual Property Index earlier this year but all four participating Canadian cities made the top quartile of global performers.
Vancouver is slotted 15th despite having the lowest returns, at 11.2 per cent, of the eight cities in Canada’s 2012 index. Toronto is 6th on the global list; Montreal is 11th. Meanwhile, Canada’s national total return of 14.1 per cent for 2012 was well above IPD’s All Property Global Index of 7.3 per cent.
“The geographic composition of IPD’s weighted All Property Global Index may partially explain why commercial real estate, though still performing well, lost a degree of momentum during 2012,” states the introduction to the IPD Global Cities Performance Commentary.
It identifies deceleration in U.S. markets, particularly in the mid-Atlantic corridor, somewhat stagnant activity in Japan, slipping dynamics in southern Europe and lacklustre outcomes in U.K. markets outside London’s west end and central city as noteworthy trends for the year. Praise for better performers is also qualified, with the notation, “Midsize commodity-driven property markets in Canada, Australia and South Africa appeared to be coasting at or near peak, rather than soaring upward.”
Vancouver’s declining returns, down from 15.1 per cent in 2011, are partly attributed to having peaked earlier in the recovery cycle – a trend likewise seen in London, Washington, Philadelphia, New York, Seattle and Portland, Ore. In contrast, Dublin, Ireland, and Lisbon, Portugal, showed some of the most significant gains as they began to make up ground from deep losses in recent years.
“Performance still varied widely from the struggling markets of Iberia to the tar sands of Alberta,” the report states. “More than 2,100 basis points separated Calgary’s total return from Barcelona, Spain (at the bottom of the scale), even though both cities were trending downward during the year.”
Toulouse, France, in the 25th position, is the highest ranked European city on the global list with 2012 total returns around 10 per cent, followed by Lyon, France, at number 28 and London at number 29. U.S. cities San Diego and Houston are ranked second and third, behind Calgary, and just ahead of Cape Town, South Africa, and Perth, Australia.
Capital growth trends also set Canadian cities somewhat apart from the pack, with Calgary’s 12.1 per cent increase second only to San Francisco’s 12.2 per cent.
“A year ago, the dataset showed that in about one-third of cities, capital growth contributed more to total return than did income return. In 2012, this pattern could be found in only nine cities, three in Canada and six in the U.S.,” the report notes.
Investors tend to look to more than one year’s performance, of course, while the status of other investment instruments also shape their decisions. An almost uniform drop in national bond yields (except for Spain, Portugal, Italy and Hungary) conversely works in real estate’s favour.
“Yield spreads in some of the world’s major markets offered increasingly attractive investment opportunities in 2012,” the report states.
Toronto is among eight such noted markets, including London, Paris, France, Berlin, Zurich, Switzerland, Sydney, Australia, New York and Tokyo.
Also telling, the four Canadian cities score a significantly higher Sharpe ratio, which reflects risk-adjusted performance over a 10-year period, than most other cities on the list. This pegs returns in relation to volatility over the measured period, enabling investors to determine what they’ve gained in proportion to the risk carried.
Vancouver boasted Canada’s highest Sharpe ratio, at 1.38, followed by Toronto at 1.2, Montreal at 1.18 and Calgary at 1.06. In comparison, Sharpe ratios for the 16 surveyed U.S. cities ranged from a high of 0.58 in Portland, Ore., to a low of 0.25 in Chicago.
Barbara Carss is editor-in-chief of Canadian Property Management and Building Strategies & Sustainability magazines.
