Multifamily assets performed well for institutional investors again last year. Newly released 2018 annual results of the MSCI/REALPAC Canada Property Index peg the total return at 11.5 per cent across 394 directly held residential properties. That’s both an improvement over the sector’s 10.3 per cent total return in 2017 and well above the 7.4 per cent all-property total return for 2018.
Capital growth drives that number. Residential was the only sector that could boast rising values in every Canadian market where index participants own properties — ranging from a 12.2 per cent jump in Toronto to a 1.4 per cent gain in Edmonton — while an average income return of 3.9 per cent is in line with continuing low cap rates.
“Residential yield has nicked down,” observed Simon Fairchild, executive director with the index producer, MSCI, as he unveiled the results in Toronto late last week. However, he also noted that “record low yields and record high prices” currently characterize the Canadian investment property market in general.
The 45 portfolios participating in the Canada Property Index collectively hold 2,424 assets, comprising more than 522 million square feet of space and valued at approximately CAD $160.7 billion. Multifamily properties account for a roughly $17.5-billion share or almost 11 per cent of the index’s capital value.
Multifamily assets delivered the strongest returns in the best performing markets — capital growth of 8.6 per cent in Vancouver, 5.5 per cent in Ottawa, and 5.3 per cent in Montreal, in addition to Toronto’s double-digit tally — but were also a rarer source of capital growth in the weaker markets of Halifax, Edmonton and Calgary. Participating on a panel of industry insiders tasked with providing on-the-spot feedback on the 2018 investment results, Steven Marino, senior vice president, portfolio management, with GWL Realty Advisors, credited multifamily as a major contributor to Calgary’s climb back to a 1.4 per cent total return after two years in negative territory.
“I think office is still very different than multifamily and industrial,” he said. “The residential market has certainly recovered.”
Among the four property sectors, industrial posted the strongest Canada-wide total return for 2018, at 13.8 per cent, representing an upward surge from 10.2 per cent in 2017. Office properties modestly surpassed the all-property average, registering a total return of 7.8 per cent, an improvement from 6.2 per cent in 2017. Retail bottomed out the chart with a total return of 4.4 per cent, slipping from 5.3 per cent in 2017.
“Industrial and residential tend to be strong wherever you look,” Fairchild said. (Industrial properties in Edmonton and Winnipeg were the exception, as they lost 1.1 per cent and 0.8 per cent in value, respectively.)
That’s also reflected in where investors are putting their money. Last year, index participants channelled about $1.3 billion into residential properties, representing nearly 19 per cent of their collective net investment. That’s up from $554 million, or 10 per cent of net investment, just four years earlier. Spending on industrial properties was even more generous, at nearly $1.5 billion, up from about $613 million in 2014.
The seven property funds participating in the MSCI/REALPAC Canada Property Fund Index have always offered a more even property mix with less weight given to retail, in particular, than is found in the directly held portfolios represented in the Canada Property Index. Yet, the funds, too, register increasing residential and industrial exposure. As of yearend 2018, residential properties account for 20.3 per cent of the Property Fund Index, up from 16.8 per cent three years earlier. Industrial’s share has gone from 18.4 to 19.7 per cent in the same period.
“Certainly, there is an active shift going on with the funds toward these two (residential and industrial) sectors and efforts to balance portfolios,” Fairchild said.
On the new construction front, activity has also picked up from earlier in the decade. In 2014, for example, just $47.5 million or 2.4 per cent of index participants’ development expenditures went to residential. “We are seeing a lot more of our peers move into the development space,” Marino reported.