Snapshot: Investment Trends – Q4 2019
Investors remain nimble and continue to take a diversified approach for optimal risk-adjusted returns
The latest results from Altus Group’s Investment Trends Survey (ITS) for the 4 Benchmark asset classes show that the Overall Capitalization Rate (OCR) continues to trend downwards, declining from 5.02% in Q4 2018 to 4.98% in Q4 2019 and down from 5.01% from the previous quarter (Figure 1).
Current domestic political risks, mounting geopolitical tensions, global trade disputes, fluctuations in commodity prices and challenges with emerging market volatility have weighed heavy on the investment landscape. Canada is still one of the most sought-after markets for investors that are seeking safe returns. A softening of the global economy led major central banks to ease their monetary policies and lower interest rates, while the Bank of Canada has kept interest rates unchanged for more than a year. According to the Conference Board of Canada, interest rates are expected to remain unchanged in 2020 and Canada’s economy is expected to grow by 1.8% in 2020 and 1.9% in 2021, a slight uptick from last year’s 1.7% growth. Investors continue to maintain a diversified portfolio focusing on a spread of safe and stable assets while also adjusting their risk profile and real estate investment strategies in core and emerging markets. Vancouver held its position as the top market preferred by investors, followed by Toronto which was the only market showing an increase in momentum this quarter, while all other markets displayed downward momentum (Figure 2).
OCR Trends – 4 Benchmark Asset Classes
Market highlights for the quarter include:
- Strong market fundamentals, a resilient Canadian dollar and historically low interest rates have investors competing over quality assets. Overall cap rates continued to compress as asset values increased, closing the year at 4.98%. Montreal showed the most compression followed by Ottawa and Halifax. Vancouver and Calgary exhibited an increase in cap rates showing both a quarter-over-quarter and year-over-year increase. Toronto remained stable with no change from the previous quarter.
Location Barometer – All Available Products (Q4 2019)
- Class A buildings continue to have a strong following from the TAMI sector. Investors look at longer- term strategies by adding value to older assets focusing on upgrades, redevelopment and intensification opportunities. Downtown Class “AA” Office cap rates dipped to 5.34% with Vancouver as the only market which moved upwards slightly. Calgary, Toronto, Ottawa and Quebec City remained flat, while Edmonton, Montreal and Halifax declined. On a year-over-year comparison, Montreal and Quebec City showed signs of compression with Halifax marginally moving up. All other markets remained the same.
- Buyer interest intensifies from both investors and users as the industrial sector continues to outperform across the board with escalating rents and low availability rates. The downward trajectory for Single-Tenant Industrial product cap rates continued the same stepping down to 5.31%. Vancouver and Edmonton held steady, while all other markets continued to compress. Cap rates ranged from 4.1% to 6.3%.
- As retail sales remain sluggish, according to Statistics Canada, the retail sector continues to struggle from the effects of e-commerce and store closures. Landlords and retailers continue to integrate more consumer experiences, food concepts and newer design and space modifications to adapt to ongoing changes in demographics, consumer demands and industry trends. Stronger performing retail assets with higher yields continue to remain on investors’ radar. Overall cap rates for Tier I Regional Malls sector remained flat for the third straight quarter at 4.84%. Vancouver, Calgary and Toronto moved up slightly from the previous quarter, while Edmonton, Ottawa, Montreal and Halifax marginally declined. Quebec City remained at a steady rate. On a year-over-year comparison, cap rates have significantly moved upwards from 4.73% at the end of 2018.
- Healthy rental market conditions and quality multi-res assets with rising income-driven yields has investors diversifying their portfolios. A low interest environment, population growth, high costs of home ownership in major cities and a rising trend of downsizing have significantly contributed to the demand. Suburban apartment cap rates moved up slightly from the previous quarter, yet showed signs of a slight compression on a year-over-year comparison. Vancouver and Calgary were the only two markets which moved up, while all other markets remained the same, except for Halifax.
Product / Market Barometer – All Available Products (Q4 2019)
Other highlights include:
- Of the 128 combinations of products and markets covered in the Investment Trends Survey (Figure 3):
- 80 had a “positive” momentum ratio (i.e. a higher percentage of respondents said they were more likely to be a buyer than a seller in that particular segment) compared to 74 in Q3 2019; 45 had a “negative” momentum ratio which remained the same as the previous quarter; and 3 were neutral compared to 9.
- The top 15 products/markets, which showed the most positive momentum were:
- Ottawa Single- and Multi-Tenant Industrial
- Toronto Food Anchored Retail Strip, Industrial Land, Tier I Regional Mall and Single-Tenant Industrial
- Vancouver Downtown Class “AA” Office, Single- and Multi-Tenant Industrial, Tier I Regional Mall, and Food Anchored Retail Strip
- Halifax Multi-Tenant Industrial
- Quebec City Suburban Multiple Unit Residential and Industrial Land
- Montreal Single Tenant Industrial
Every quarter, senior Altus Group professionals reach out to over 200 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 more than 15 years, the survey provides valuable insights on investor preferences and valuation parameters for 32 asset classes in Canada’s 8 largest markets.