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MSCI/REALPAC Canada Property Index Reveals Modest Investment Returns

The results from the latest, eagerly anticipated MSCI/REALPAC Canada Property Index are in. As expected, the returns slipped due to the various economic forces currently impacting the real estate markets globally, including interest rate hikes, inflation and slower economic growth.

The total return on all assets in 2022 was 2.3%, down from 8.0% in 2021. That’s below the annualized average of 5.9% for the last decade. The index represents 2,370 directly held real estate assets in 48 institutional portfolios, comprising 489.5 million square feet and valued at $172.8 billion.

The total return on standing assets – which encompasses directly owned buildings – was 1.35%. That broke down to a 4.35% income return and a 2.9% loss in capital growth across the entire index.

Total returns have fluctuated somewhat in Canada since 2019. That year saw healthy returns but was followed by decreases driven by the COVID-19 pandemic turbulence in 2020, when the total return was negative 3.7%. Then 2021 saw a significant rebound in returns.

While all sectors trended downward, which asset classes still shine?

Industrial and multifamily/residential remain the top-performing asset classes in Canada, delivering total returns in 2022 of 17.1% and 4.8%, respectively. Industrial capital growth was 13.1% and multifamily was 1.5%. While these sectors remain the darlings of the Canadian investment market, their returns dipped from last year when total the return for industrial was 30.6% and residential was 7%, according to the Real Estate News Exchange.

One reason the industrial sector continues to boast a solid performance is rates continue to escalate. Net rental rates reached an average of $13.71 per sq. ft. in the fourth quarter of 2022, setting another new record for growth at 30.9% year over year, reported CBRE.

Additionally, a record amount of new industrial supply was delivered in Canada in Q4, with 12.7 million sq. ft. Market conditions remain tight with the national availability rate at just 1.6%. Demand for industrial, particularly warehouse and distribution space, continues to outpace supply.

For the multifamily/residential sector, healthy demand fundamentals and limited supply are leading the market to brace for another solid year.

Predictably, office and retail were the hardest hit sectors

Returns were negative for office and retail in most of the eight major Canadian cities in the index. Office posted a total return of negative 5.8% and negative 10.2% capital growth.

Office is still an important target for Canadian investors globally, MSCI/REALPAC noted in the report. However, question marks remain. While more employees are back in the office, the sector still suffers from diminished demand as office usage patterns shift.

Retail posted a negative 3.9% total return and an 8.4% decline in capital value. Retail is in recovery mode, yet it remains a challenged sector.

Triovest CIO weighs in on Canada’s returns

Triovest CIO Prakash David recently participated in the well-attended 2023 Canada Real Estate Investment Forum in Toronto on Jan. 31. Along with an esteemed panel of experts including industry professionals from KingSett Capital and Ivanhoé Cambridge, Prakash helped assess the index results and state of the industry.

“While there were no surprises in the index, Canada continues to outperform many other countries globally,” notes Prakash. “Despite uncertainty over rising interest rates, and therefore, asset pricing, investor confidence will remain solid in 2023, particularly for industrial and multifamily properties, as they have a proven track record of outperforming during economic downturns.”

Despite returns trending downward, Canadian real estate outperformed other markets worldwide

Three other countries have released their 2022 returns so far. The U.S. leads the way with a total return of 5.7%; however, other countries didn’t fare as well.

According to Reuters, UK property returns in 2022 fell 10.4%. Much of the losses came in the second half of the year, which saw returns of -18%, the index showed., the lowest level since 2008. According to MSCI, UK industrial was hit the hardest with property capital values plummeting 26% in the second half of 2022, their largest drop on record.      

Returns on Irish real estate assets slid 4.5% in the final quarter of 2022, bringing the annual rate of decline in 2022 to 6.2 percent.

The expectation is that other global markets will experience declines in returns when their indexes released.

 Industrial, multifamily/residential in Triovest’s wheelhouse

Investors will face new challenges in 2023 and need to leverage local expertise. The main asset classes that are outperforming in Canada – industrial and multifamily/residential – are in Triovest’s wheelhouse. Triovest is a top industrial player in Canada and is developing a strong multifamily platform.

Regardless of the fluctuations in the market, investors need to work with experienced professionals who can provide customized solutions, both from an investment and advisory perspective.

Luigi Luppi
VP, Investor Relations

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