Canada vs Australia. What Commercial Real Estate Market Is Stronger?
December 19th, 2013 by Diane Moore
They may be located in different sides of the globe, but Canada and Australia seem inseparable because of their similarities. Canada has an urbanization rate of 81% while Australia has 89%. Both speak English, both were once under colonial rule, and both are sparsely populated especially in their major cities.
Yet, there are important differences. Take their commercial real estate market, for instance. While both countries have an attractive investment policy that can easily attract investors, investor confidence for both is not the same. Dissimilarities are also evident in the markets’ average cap rates, occupancy rates, capital inflows, and other fundamentals.
So What Country Has the Stronger Market?
Is it Australia, whose popularity among global core investors continues to grow? Or is it Canada, whose real estate industry has been easily described as “stable” and “healthy”?
It could be a difficult question to answer. So to help investors make the right decision, we analyze both countries’ fundamentals and their market outlook for the new year.
Market Outlook and Emerging Trends in Canada
The Great Recession may well be over, but the story of how Canada withstood it better than most countries is still echoed today. It can be remembered that during the downturn, Canada suffered just like any other country. Export earings dipped, 400,000 employees lost their jobs, and company profits plummeted.
Five years after the crisis, Canada’s recovery has been mixed. According to The Star, 54% of wealthy Canadians feel that they have bounced back from the market crash. But for 54,000 employees who were laid off last year, a “miracle economy” is far from reality.
This mixed result is also a reflection of Canada’s real estate industry. According to the Canadian Housing Observer, the housing sector is most likely to increase modestly in 2014. But to some observers, this is putting it on a more positive note than it actually is.
Housing prices have experienced an erratic up-and-down pattern over the past 5 years. Before 2008, prices had increased. They plummeted for a while during the recession and enjoyed a steady increase in 2010. This year, the sector started low. While a modest improvement is predicted, government officials have aired concerns of an overheated housing market. To them, this remains a main risk.
In the commercial sector, the story has a different turn. According to the TD Bank Group, the country’s commercial sector is primed for growth. In 2011, transactions totaled over $21 billion, which according to records, is very close to pre-recession levels. Last year, demand for office spaces was also strong, and optimism was high. This is expected to continue in the next coming years.
In the Emerging Trends report for Canada, PwC summarizes investor confidence in this statement: In 2014, investors in Canada will invest in properties purely for yield. Competition for both good assets and capital is expected to be stiff.
The report included the following projections in the country’s commercial sector:
- Although the average “buy” and “sell” ratings are expected to dip slightly, the market will remain strong in 2014. “Buy” will slip from “modestly good” to “fair.” “Sell” will keep its “modestly good” rating. This balanced rating is good for investors who wish to sell their properties.
- Cap rates will increase across 11 property sectors. Sectors that are most likely to experience the largest increase are office spaces, apartments, and R&D industrial properties.
- REITs will no longer be the dominant buyers and will be replaced by pension funds. REITs are now being selective with where to put their assets, with some of them investing outside the country.
- The following property sectors offer good investment prospects or opportunities: warehouse industrial, regional malls, central city office, neighborhood / community shopping centers, apartment, and power centers.
- The following sectors offer good development prospects in 2014: warehouse industrial, apartments, central city office, and limited-service hotels.
- In some markets such as Montreal, developers favor redevelopment. As a result, there will be no over-supply of inventories in these markets. Old office buildings will be redeveloped into either new ones or for other uses.
- Suburban offices will be hit badly as more Canadians prefer to live in major cities across the country. Expected cap rate for this sector is 6.9%. 37.8% of those interviewed for the report suggest a “sell” action, compared to only 22.2% for “buy.” Meanwhile, 40% suggest a “hold.”
- The retail market has the highest investor confidence, with more than 41.7% of respondents suggesting a “buy.” Only 2.8% went with “sell,” while 55.6% maintained a “hold.” Though online shopping is slowly crippling the retail sector, PwC maintains that buying a retail property does not pose a huge risk.
- Investment prospects for both limited- and full-service hotels are expected to be weak in 2014. Hotel transactions are expected to be low.
- Rental apartments will remain to have a “modestly good” investment prospect rating. In Calgary, Vancouver, and Toronto, investors are urged more to “buy” rather than to “sell.”
Of the key cities in Canada, Calgary topped the list of markets to watch for. It gained the highest points for overall real estate prospects, including investment, development, and homebuilding.
For the second consecutive year, Calgary is rated number one among the respondents employed by PwC. It has held this spot since last year because developers have come up with an ingenious incentive program to keep builders under an exclusive contract. They do this through profit-sharing.
The biggest driver in Calgary is the energy industry. Together with the goods and services sectors, it has supported the economy. Economic projections in Calgary are at 3.4% for 2014. This is a 0.1% increase from 2013. This economic growth is enough to support consumer spending.
Market Outlook and Emerging Trends in Australia
The image is the courtesy of freefever.com
When foreign investors no longer saw the existence of an “Asian core asset,” they shifted their attention to Australia. This is evident in the amount of transactions made this year. According to reports, investors from Singapore and China have developed an appetite towards properties in Sydney and other key cities in Australia.
But according to PwC, this gold rush will soon reach an end. This is because the existing pool of assets is depleting fast. There is a surge in capital inflow from both foreign and local investors, so the competition has gotten really stiff.
In the past, when a similar situation happens, investors would normally stop buying. These days, however, they have learned to adapt. In Australia, there is a surge in activity for suburban offices. Investors feel that spaces in CBD markets are tight, so suburban offices are deemed the best alternative.
This shift to secondary assets has also brought about a preference for multiple, yet smaller deals. Cash-rich investors prefer to buy grade-B, yet stable and cash-flowing assets in secondary locations.
Interest in distressed properties may also start to emerge next year. In Australia, the most likely types of opportunities to emerge for distressed properties include the following: mass-planned projects from residential land.
In a market research published by First National Real Estate, the following trends are to be expected in Australia’s commercial real estate:
- Office investment is getting more and more attractive, but the greatest growth will be experienced in the industrial sector. According to the research, however, the greatest challenge of Australia’s commercial real estate market is the country’s low consumer confidence.
- The rural/regional property market is expected to perform well. However, some risks can dampen this performance. Examples include over-supply and lack of demand. This is consistent with what PwC has reported.
Canada vs Australia: Which Market is Stronger?
Considering all factors, Australia seems to have a stronger market.
Standard Life Investments argued that Canada’s fundamentals are attractive enough for investors. For instance, the vacancy rates in the country — particularly in key markets such as Calgary, Vancouver, and Toronto — are a lot lower than many European and Asian cities.
Other key takeaways mentioned by Standard Life Investments include the following:
- Canada has maintained its “safe heaven” status.
- It has a strong banking system and financial sector.
But in recent months, there have been fears about two things: a recession in Canada and concerns that the country may lose its “safe heaven” rating. As mentioned in the previous section, more than 50,000 employees were laid-off since last year. The government took measures, but its efforts were not enough. The country’s job growth for this year is said to be the worst in the past decade.
As if that’s not bad enough, it seems like the concerns over Canada’s “safe heaven” status are valid. If it’s not, investor confidence would remain strong despite these talks. In a report released by Jones Lang LaSalle early this month, cross-border transactions made by Canadian investors reached a total amount of more than $11 billion. These investors are usually found shopping for properties in Europe or the US.
While Canadian investors are putting their money outside Canada, Australia is enjoying a surge in foreign investments. Last September, it was reported that $18.5 billion was pumped into Australian commercial property from foreign investors. This investment came from firms based in Singapore, Europe, and the US. According to reports, the preference of this firms was prime grade properties in CBD areas.
In comparison, transactions made in Canada totaled only $14.4 billion during the first half of 2013. Of this amount, $2.3 billion was from foreign investors. Most of this investment is pumped into the retail sector.
Based on these transaction volumes alone, investor confidence in Australia seems to be stronger than Canada’s. Even Canadian investors are moving their money where they can have higher returns.
Aside from a higher investor confidence, other reasons why Australia’s commercial real estate is stronger than Canada’s include the following.
First, foreign direct investment is expected to rise steadily in the next years to come. Local investors are faced with numerous challenges in obtaining capital in Australia. With these challenges, activities of domestic investors are obviously limited. As a result, competition is reduced, and foreign investors can easily snag properties across the country.
As a result of the restrictions on debt financing for local investors, there have been many projects put on hold. Therefore, any new projects spearheaded by foreign firms can be supported by pent-up demand since the global crisis.
As far as the economy is concerned, Australia has enjoyed an uninterrupted growth in the last 22 years. It has a diverse economy that ranges from manufacturing up to the retail industry. This is more than enough to sustain population growth.
Also, Australia is politically stable. Earlier this year, there have been talks about the negative impacts of the Australian Federal Election to the country’s real estate industry. However, it has been proven that the country has remained resilient and stable.
According to the IMD World Competitiveness Yearbook (2007), Australia ranks 4th in the world as having the lowest risk of political instability. The same organization also ranked Australia as having the second best justice system in the region. Aside from those honors, Australia was also ranked as having the most resilient economy in the world.
As far as location is concerned, investors love Australia’s strategic location. From its unique time zone up to its cultural affinity with its neighboring Asian countries, Australia has consistently been a favorite investment hub. This shows in the country’s strong trade and political relationships with Japan, Singapore, China, and South Korea. According to statistics, services outsourced to China increased by more than 110%.
When it comes to stability, it takes more than volume of transactions to decide whether a market is strong or not. In the case of Australia vs Canada, the former wins hands-down. Not only does Australia have higher transaction volumes to back this up. But it has proven itself to be a resilient and stable economy. Canada is also a good investment hub, but in the past 12 months, concerns about a possible recession and ove the country’s “safe haven” status seem to have considerable merit.
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