The latest commercial real estate statistics suggest that less capital was invested in the first half of 2014 than the previous year. Furthermore, the value of Canadian commercial real estate transactions dipped by 10 per cent in the first half of 2014.
Is Canadian commercial property on the decline?
The simple answer is no. While the numbers might show a dip, the figures don’t actually reflect any lack of liquidity in capital markets or demand. Rather, the numbers reflect the tightness of commercial income property inventory available in Canada. A combination of current landlords choosing to hold onto their investments long-term, in order to retain top yields and value, and private Canadian investors moving to snap up deals. In fact, individual investors have reportedly beaten out large funds in investing in Canadian properties in 2014.
So if Canadian commercial real estate is still on the way up and is a great investment, where are the best opportunities for individual investors?
Here are 4 Canadian commercial real estate trends and opportunities to watch out for:
Retrofitting and redeveloping properties to increase value
Retail and shopping plazas are still expanding
Edmonton, Alberta is a rising star
Partnership opportunities for diversification and professional asset management
Contrary to some potential misinterpretation of the numbers; Canadian commercial real estate is alive and kicking. The key is finding the right opportunities among the above four categories.
Many Canadians have found their investments and portfolios have bounced back since the last economic slowdown and have performed well in 2014. But with the year drawing to a close, and foreseeable changes happening already, here are some areas Canadians should look at to best prepare their investment portfolios for 2015.
Getting into the habit of reviewing your portfolio annually can be beneficial. Not only can you adjust to upcoming changes for the year, it also allows you to stay engaged and updated.
Here are some important questions to ask before the end of the year:
How have your current investments performed this year compared to previous years?
How are your investments performing in terms of desired goals?
What are the projected performances of your investments in the next 5 years?
Are there any emerging trends that can affect or alter your investments in the next year?
What are your investment goals next year? In 5, 10 and 30 years?
Like any business, financial moves need to be reviewed, strategized and re-strategized to ensure the rewards outweigh the risks.
In Dec. 2014, Globe and Mail highlighted the biggest challenges facing Canadian investors today: providing for their children, securing income and financing for retirement.
It can be a tightrope walk for many Canadians trying to find a balance between financing for the present, for their children’s future and their own retirement plans.
Fortunately, there are avenues to help reduce the stress, allowing families to target all areas at the same time. Investing is a great option to take, especially in commercial real estate. This underlying hard asset provides security, as well as financial provision.
Sound commercial property investments can put retirement saving on autopilot. Often these investments provide stable and passive income, and when paired with third-party partnerships, they require minimal effort.
Commercial real estate investing can be a great move year round. However, there are extra perks and motivation to invest near the end of the year.
1. Last Chance to Reduce Tax Bills
Commercial property investment can help offset increased income and capital gains. These investments can also help reduce overall tax liabilities.
2. Seasonal Opportunities on Sale
Along with other consumer goods, holiday season can also bring discounts on investments. Property sellers can get nervous with the lack of buyer activity during this slow period, giving real estate investors additional negotiating power and helping them build in more value and high returns.
3. ‘Peace & Good Tidings’
A sound commercial property investment can really deliver peace of mind. Investors can be confident their investments are generating steady wealth for them.
There may not be much time left to acquire the commercial property investment you have had your eye on, but this is the time to act on it.
After the New Year, analysts are predicting there will be a surge of capital entering the Canadian marketplace.
Recently, private Canadian investors have been outpacing large funds in acquiring commercial property investments. The attraction is clear, but how much of your savings and investment portfolio should be dedicated to this sector?
To determine, individual investors must understand what these types of investments would do to their portfolio, including advantages and risks, all while comparing it to other types of investments.
According to the Harvard Business Review, the process of investing should reflect your income needs. Below are several investment periods.
1.) Stable Investments – These investments will provide the minimum income you need to live the lifestyle you require.
2.) Slightly Riskier Investments – Investments that fall into this category enables you to generate more disposable income to take your lifestyle to higher levels. However, you are not dependent upon them for your mandatory living expenses.
3.) Risky Investments – These opportunities should make up a small portion of your portfolio, as they have a higher-risk probability. However, these investments can generate large returns on investment if successful.
Commercial real estate classifies as “stable investments” and can provide you with mandatory minimum income.
Analysts estimate that 30 per cent of your portfolio should be allocated to income producing real estate. Of course, that number will fluctuate depending on your disposable income.
New reports suggest investment related fraud continues to grow on a national and international level. What are the risks that Canadian investors face and how can they avoid becoming victims, all while maximizing, their portfolio’s potential?
A host of fresh fraud allegations, investigations and data shows that fraud and similar issues are apparently growing, rather than being eradicated. The recent news of a highly praised Canadian home renovator with his own TV show going bankrupt and taking hundreds of thousands of dollars of local property owners’ money with him has shaken the confidence of many.
The Globe and Mail and Ontario Securities Commission reports Canadian based TD Bank was just found to have been overcharging clients for 14 years. Over 10,000 accounts have reportedly been affected with erroneous charges exceeding $13.5 million. Another fund was just ordered to pay $23.3 million by a BC regulator. On November 13th, 2014, the Edmonton Journal reported that global banks are facing new fines for rigging markets. In the US, the Mortgage Fraud Application Index rose over 3% in 2014. This is on top of lost opportunity costs and subpar investments that simply didn’t perform as promised or expected.
So what can Canadian investors do to avoid being taken advantage of by these traps, and missing out on the best returns?
Individual Canadian investors must do a little home work themselves. Take a few minutes to research the opportunity, companies and professionals involved in any investment and their track record. Those that don’t take a moment to look beyond the glossy hype will unfortunately be met with disappointment. This applies to doing business with the large high-profile names of today as well.
Evaluate the model
How is the investment model weighted? What built-in checks and balances are in place for sponsors and managers to ensure the on-going performance of the investment and to deliver returns for clients?
Understand what you are investing in
While it may not be efficient, necessary or even feasible to fully master every intricacy and nuance of every investment, investors need to have a good handle on what drives performance and what the potential best and worst case scenarios are.
Pace how you invest
Dumping every penny of your savings or retirement fund into a new investment with a new manager is asking for trouble. It also breaks the most basic investment and financial principles. Thankfully, new models such as partnership opportunities for investing in commercial real estate make it easy to test the waters, stay diversified, and scale with confidence as investments and managers prove themselves.
Don’t forget taxes
Investors can’t neglect shielding themselves from unnecessary tax liability either. Don’t allow great returns and gains to be stripped away by taxing authorities out of a failure to choose tax beneficial investments like real estate or keeping good records.
By following the above tips, Canadian investors can make significant strides in reducing liability and securing sustainable positive returns over the long term.
Canadian shopping plaza investments are increasingly standing out as prime choices for private investors. So how do they work?
Canada’s commercial property market continues to perform well in the retail sector, with Calgary and Edmonton emerging as top options. While investing in local shopping plazas is one of the more straightforward options when it comes to investing today, it is still a new concept for many individuals. How do private investors get in and out of these opportunities, how do they earn returns and what is important to look for in well performing properties?
Getting Into Your First Shopping Plaza Investment
Whether you are new to commercial real estate investing or are an experienced investor looking to hedge your risk, the smartest way to get involved with shopping plaza investments is likely via a syndication or partnership. These structures provide you with the ability to invest less capital and benefit from the financial strength of multiple accredited investors as partners. Once you become comfortable with this asset class, it is relatively easy to scale up and acquire additional interests in other shopping plazas and retail properties. This method of investing ensures additional safety and consistency in your investment performance, along with greater diversification.
Getting Out of Your Shopping Plaza Investment
While investors who are the sole owners of a property can opt to sell their properties on a whim, pooled investments are generally managed based on a predetermined timeline. These may be set deadlines for putting a property on the market, deciding to hold an asset indefinitely with the option to sell and cash out your personal stake at any time. As ab example, owners may decide to re-evaluate the investment after 5 years and vote on whether to continue to hold or liquidate a property, depending on the market and future performance projections from that vantage point.
Yield, Income, and Cash Flow
One of the chief reasons sophisticated Canadian investors choose retail real estate investments is for the consistent yields. Cash flow is generated from renting units to business tenants, and sometimes via additional revenue streams. Well-written retail leases can provide landlords with incredible upside potential over a modest period of time. Net operating income (NOI) has been improving thanks to technology and increased efficiency in property management. Cash distributions really depend on the investment model, but for many investors, the passive income from these properties is more than enough reason to invest in retail properties.
In addition to income and tax benefits, Canadian shopping plazas also offer investors the potential for substantial capital gains from appreciation. While values will fluctuate over time, they have so far proven to always bounce back higher and are currently on an upward trajectory. For smaller retail centers there is always the possibility of increasing equity at any time via value add improvements and higher rental rates.
Canadian shopping plazas have a lot to offer private investors and are relatively easy to navigate. However, real performance will all come down to the individual investment and most importantly, who is managing the property on a daily basis.
To hone in on the best type of property for investors today requires looking at which elements are most important to those investing. So what are they? Security is often the biggest one. Sophisticated Canadian property investors want to invest in bricks and mortar that will preserve their capital. Second to safety is which properties are most likely to perform consistently.
To determine this, investors will want to hone in on which types of properties are most critical and needed in the current market. For example, new sports arenas and museums might be valuable, and they may certainly help anchor a locale and increase interest, but most would reasonably argue they are not necessities.
Some may pose that industrial real estate is the most important, especially in provinces such as Alberta. After all agriculture, manufacturing and energy are all crucial backbones of sustainable economies and provide real wealth building and job creation. However, industrial property can be a virtual minefield for most Canadian investors. This type of property can be tricky to develop, manage and sell for those not intimately familiar with the market. On top of this, industrial properties can have a much smaller user and buyer base than other types of properties. With energy production, regulations and technology constantly changing, it can be difficult to determine where performance for this property type is headed.
After industrial, office property may be assumed to be a significant indicator of local economic strength, job creation potential and financial stability. Strong office markets used to suggest strong broader real estate markets but this is no longer the case. With 60% of the population on the way to working remotely, there has been a drastic change in the demand for working space, resulting in serious uncertainties regarding the future of the office property sector.
Most individuals would instinctively point to residential properties, as the most “needed” type of property. Whether it’s single family homes, multi-family apartment buildings or hospitality venues such as hotels, everyone needs somewhere to live and stay.
In destinations such as Edmonton, there are clear shortages in housing, which suggests that future growth is on the horizon. From purely an investment standpoint, multi-tenant properties have significant advantages in value, cash flow performance, efficiency in management and reliability. However, even when things are at their worst, homeowners and renters will skip their housing payments before they stop shopping for essential products and services, such as food and household items.
Retail Investment Property
It is hard to refute the fact that retail, specifically local shopping plazas, are the most important property type for the current market. As a result, they are likely to perform consistently and hold their value over time, while producing consistent cash flow in the interim. Retail can also pose far less liability when compared to residential landlord-tenant lawsuits.
The world’s wealthiest individuals continue to consider commercial real estate as one of the most desired assets in their portfolios. So what is it that makes this asset class so popular for the affluent and sophisticated investor?
Call it yield, cash flow or passive income, but the point is that commercial property delivers it. For savvy investors, income is even more important than asset value. Everyone needs income, and particularly passive investment income.
2. Wealth Preservation
For wealthy individuals, preservation of capital is even more important than investment gains. These investors are risk adverse, and understand that promises of investment returns do not justify risking their capital. Commercial property is amongst the best investments when it comes to capital preservation, as it is a tangible asset that can provide wealth protection for families over the long run.
One of the main reasons many affluent Canadians choose real estate investment is for the tax benefits. Direct real estate investment offers many potential tax breaks and deductions. This can be taken even further by using tax preferred vehicles for investing in real estate in order to reduce tax liability and even generate tax free returns.
4. Capital Gains
Capital gains are the icing on the cake when it comes to commercial property investments. They are not normally the primary reason to invest, but can provide substantial passive wealth gains in both the short and long term. Property value cycles are in general quite predictable. Timed well, investors can use this to speed up their portfolio growth, as well as providing lump sum cash needs for larger expenditures later in life.
5. Building the Local Economy and Community
Aside from the direct financial benefits of investing in commercial real estate for personal gain, these assets are also responsible for improving communities as they create jobs and inject cash into the economy.
6. Teaching Kids Essential Investment Principles
Even when there are no immediate financial needs for increased income, wealth or tax breaks, making new investments in commercial property can provide great teaching moments for future generations and can equip them to provide for themselves in the years to come.
In summary, there are many reasons to invest in commercial real estate in Canada for both young and mature investors. Regardless of your priorities, it’s worth taking a look at this investment sector and the broad array of benefits it incorporates.