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As stable markets with limited supply, Canada’s largest cities draw investors to their real estate sectors with Toronto and Vancouver emerging as top investment spots on the global property market.  

November 2015

In its World Winning Cities Series 2015 report analysing the ‘Canadian Quartet,’ namely the cities of Montreal, Toronto, Vancouver and Calgary, real estate consultancy JLL claims that “until recently the strengths and the global relevance of Canada’s leading cities has been underestimated and overshadowed by a historic perception of a lack of dynamism and a dependence on their rather larger neighbour.”

However, some people argue that it is really Canada which deserves to be in the spotlight when it comes to investment opportunities on the North American continent. Experts say that Canada possesses several advantages over the U.S. such as greater economic freedom, lower taxes and economic sectors (strong natural resource base & manufacturing) that complement each other well during cyclical fluctuations.

Commenting on the real estate sector, Ross Moore, Director of Canada Research at CBRE, says: “Traditionally Canada exhibits far less volatility than the U.S. Take the vacancy rate as an example – vacancy rates swing considerably more (both to the high and low end) in the U.S. than they do in Canada.”

He points out that the U.S. has a habit of building too much whereas building in Canada is more difficult – here, investors don’t have to worry about too much construction and oversupply. “If you look at the last 15 years, you can almost count the number of apartment buildings which have been built in all of Canada on two hands,” Moore says.

According to JLL, Canada’s Quartet is now highly competitive and globally networked, not only in the energy and finance sectors but also in science, technology, medicine, education and the green economy.  “What has emerged is a unique grouping of globalising cities whose attributes more closely resemble those of the international front-runners for quality of life and commercial opportunity – the Zurichs and the Melbournes – than they do their American neighbours,” the firm says. Let’s look at foreign investor trends and each of the cities in more detail.

Capital inflow

“We seem to get waves of foreign investment which is not unusual,” says CBRE’s Moore. We’ve had investment from Germany and the Middle East and in the 1970s, the UK was a big investor. Today it’s primarily Asia; China has entered the market in a big way.”

Historically, foreign investment in Canada was mainly directed towards downtown office space and retail in big cities, but in line with the changing buyer profile, Canada’s residential sector is coming more into focus.

“We are now seeing more foreign interest in the residential sector, particularly from the Chinese,” says Moore. “We’ve seen apartments trade hand as well as residential land. A Chinese group paid almost 100 million Canadian dollars for a piece of land in downtown Toronto whilst in Vancouver a large plot has been bought by Chinese investors to develop a residential development that will be worth hundreds of millions of dollars,” Moore adds.

And what about the U.S.? “Of course U.S. investment is always there, both on the equity and the debt side, especially with the current exchange rate which would potentially allow the investor to buy into Canada at a 20 or 25 % discount,” Moore says. However he is quick to add that whilst Canada will always be on the radar screen of American funds, the pricing in Canada is so aggressive that many U.S. funds would place their capital elsewhere.

“If you’re a New York or Boston based fund Canada will always be on your radar screen but since cap rates are so low you’d rather buy industrial in New Jersey or Orange Country because it’s a better price,” he explains. Moore adds that with the weak Euro, U.S. funds are more focused on Europe as well as of course on Latin America. Lastly, with oil prices of where they are, “most U.S. funds have a pretty negative view on Canada as it is viewed as mainly a petro-based economy, which is not correct,” he says.

Toronto – ‘flavour du jour’

The Toronto real estate market is one of the most sought-after in Canada. Real estate investors are eager to deploy capital within the already competitive market. Consequently, both local and national investors are quickly purchasing commercial properties which means that good-quality, well-located properties are difficult to find.

“Right now people love Toronto, it is absolutely the ‘flavour du jour,’” says Moore. “It’s both the financial and the business capital of Canada and every business in Canada flows through Toronto in one way or another. It’s also a growing city; over the last 10 years, the population of the GTA (Greater Toronto Area) has almost increased by 20%, which, for a big city, is a very high growth rate.”

According to Moore, Toronto has a good financial and technology base and its real estate market comprises of a good mix of business services and distribution, warehousing, and corporate head offices. Importantly, the city is not affected by the fluctuating oil prices.

“Up until recently, if you spoke to a fund manager, they would have said there are only two places in Canada where I’ll put their money: Toronto and Alberta. Now they’ve put Alberta on hold and focus on Toronto. This means Toronto will become even more the place of the moment; pricing is very aggressive,” Moore comments.

Montréal – long term opportunity

Montréal is the largest city in Québec and the second largest city in Canada. Predominantly French-speaking, Montréal is known as a creative city with a vibrant scene of media, fashion and design firms combined with restaurants, art and nightlife. A large student population and extensive cultural industry see to it that Montréal has a unique late-night culture not too common elsewhere in Canada.

In terms of real estate potential however Moore doesn’t see great short to medium term potential but thinks that it’s worth looking at long term. “Montreal is a great city but it’s seen very little growth. Pricing is attractive but I see it more as a long term opportunity,” he says.

Language is an issue and higher taxes mean that businesses don’t like to locate to Montréal. “On the positive however you’re buying into a stable currency, pricing is not too high and you won’t have to compete against numerous other buyers. The new mayor and provincial government are pro-business and the newly elected Canadian prime minister has strong ties to Quebec which means more federal type spending and hiring might occur in Quebec,” Moore says, adding that “for those investors with a higher risk tolerance, Montreal could be a good place.”

Calgary – Canada’s oil & gas capital

Moving towards the West, Calgary lies in the province of Alberta and is Canada’s oil and gas capital. Whereas the densities of Toronto, Montreal and Vancouver are all fairly similar (comparable to Chicago and Boston), Calgary’s urban form is spread out over a much wider area. Traditionally more than 90% of real estate development has been in the suburbs, according to JLL.

“There is only one industry that drives real estate in Calgary: oil & gas,” says CBRE’s Moore who doesn’t see Calgary as a great short term opportunity. “The low oil prices are really hurting Alberta; it’s a very soft market. Leasing activity is down, office rents have come down 50% in the last 12 months and there is virtually no demand for warehouse space,” he says.

Although the retail sector is holding up reasonably well, the story for office and industrial is different. Moore believes that some of the office and industrial projects currently underway in Calgary will eventually be put on hold.

“For the next 24 months or even two years, I don’t see the situation changing. As long as oil prices are down, companies aren’t hiring. The investment market has gone very quiet and we’re not seeing any transactions of note,” he says.

Vancouver – the real estate gem

Last but not least, Vancouver is a stunning coastal seaport city on the mainland of British Columbia. It is one of the most ethnically and linguistically diverse cities in Canada and is consistently named as one of the top five worldwide cities for liveability and quality of life.

According to Moore, it is also where Canada’s greatest real estate potential is to be found. “There’s probably more growth in Toronto but Vancouver is more promising. We have an emerging technology hub here, San Francisco is an hour and a half flight away, we have biotech, film and TV, a good government sector, briefly, it’s highly diverse economy,” he says.

Vancouver has weathered each economic downturn better than any other part of the country and property prices just kept increasing. And it is because of this that Moore names Vancouver as “possibly the greatest real estate enigma.”

“There is no obvious man driver; we don’t have a dominant employer like Boeing, Starbucks or Microsoft, yet people continue to move here; we’ve got a very large Asian population and the economy just keeps on growing. We’re looking at growth of over 3% this year which for a mature economy is a good number,” he says.

In terms of real estate, Moore says that there’s a small office construction boom going on (this year saw four office towers enter the market in one quarter) but most new buildings are already fully leased. “It’s a great market however pricing can be a real challenge.”

But with such an incredibly high demand, Moore is convinced that the future looks bright for Vancouver real estate. “Vancouver has always been expensive yet anybody who’s bought here in the last 20 years has done very well,” he concludes.