Institutional investors

Institutional investors see residential gains

Monday, February 12, 2018

Institutional investors participating in the REALPAC/IPD Canada Property Index generally realized the best return on investment from their residential holdings last year. Recently released results for 2017 show a 10.3 per cent total return across 356 residential properties in the index, placing the sector just slightly ahead of industrial as the best commercial real estate performer.

This was the third consecutive year the index showed improved returns on residential investment, and the second year running that residential was the top-performing property sector. Capital growth of 5.8 per cent was a notable component of the 2017 total return, but that index-wide average hides much more diverse trends across major Canadian markets, ranging from a 9 per cent gain in Toronto to a 1.3 per cent drop in value in Edmonton. Residential properties’ 4.2 per cent income return was below the index-wide income return of 4.8 per cent — a consistent trend in the past three years.

Residential properties account for 9.3 per cent of the index’s capital value, which is the smallest share among property types. (More than 40 per cent of the index’s capital value is in retail properties.) Twenty eight of the 43 portfolios represented in the index hold residential properties that are collectively valued at nearly $13.9 billion.

By comparison, the seven funds in the REALPAC/IPD Canada Fund Index have greater residential exposure, equating to nearly 18 per cent of collective capital value. These listed funds delivered a 7.8 per cent gross fund total return last year, compared to the 6.7 per cent total return across the 2,455 directly held standing assets reflected in the property index.

Toronto and Vancouver were the top markets for index participants, while the low-performer provided a glint of optimism. “The pace of decline in Calgary has slowed,” Simon Fairchild, executive director with the index producer, MSCI, told the gathering on hand in Toronto earlier this month to hear the results.

Investors’ residential properties in Calgary lost 1.1 per cent of value, but their office properties suffered a more pronounced 7.6 per cent depreciation. In other cities, index participants saw capital growth on their residential properties of 8.4 per cent in Vancouver, 4.8 per cent in Ottawa and 1.4 per cent in Montreal.

Industry analysts on hand to offer on-the-spot reaction to the results were inconclusive in assessing the impact of the Ontario’s government’s extension of its rent control regime last spring. Previously, the rules applied only to rental housing built before 1991, but as of April 21, 2017, rents for all existing tenancies are subject to annual guidelines for allowable increases. Landlords can still raise rents to what the market can bear when a unit turns over — and those market dynamics are buttressing residential value.

Colin Johnston, president, research, valuation and advisory with Altus Group, outlined the two major contributors to the landlords’ market: prolonged underproduction of new supply; and escalating housing demand pressures from both renters and owner-occupiers. While acknowledging concern that the new rent controls could put the brakes on what was looking like a resurgence of purpose-built rental housing, he suggested investors behind a new wave of construction could continue to see payoffs from bringing a much sought product to a constrained market.

“The developers kind of talk out of both sides of their mouths,” he said. “They like the situation of restricted supply.”

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