Canadian real estate executives remain positive, with expectations of improving markets

The Real Property Association of Canada (REALpac) and FPL Advisory Group have announced the results of the Third Quarter 2011 REALpac/FPL Canadian Real Estate Sentiment Survey, which recorded the thoughts of 49 real estate executives, including CEOs, presidents, board members, and other leading executives from a broad set of real estate sectors including owners and asset managers, financial services providers, and building operators and related service providers. Survey respondents represent income producing real estate assets including office buildings, retail shopping centres, industrial buildings, hotels, multi-family residential (apartment buildings), and seniors’ residences.

This quarterly economic survey serves as a gauge of senior real estate executives’ confidence in financial and real estate markets in Canada. The REALpac/FPL Canadian Real Estate Sentiment Survey measures executives’ current and future outlook in three areas including overall real estate conditions, real estate asset values, and availability of capital. Three Sentiment Indices comprise the survey including a Current Conditions, a Future Conditions and an Overall Conditions Index.

Topline Findings For the third quarter of 2011, overall real estate sentiment remains positive, reflecting respondents’ expectations of improving markets. However, expectations are moderating slightly, as reflected by the index score, which has dropped slightly this quarter, to 66 from 70. It is important to note that the Sentiment Index measures the market trajectory and is scored from 0-100, meaning scores above 50 reflect positive trends and score below 50 reflect negative trends. This quarter has been the eighth straight quarter in which the Index has been above 50.

This quarter, the Current Index is at 71 and the Future Index is at 61, reflecting respondent perspectives that market conditions, while still expected to improve, will not improve at the same pace seen over the past year. Notably, respondents are generally pleased with the current state of the Canadian real estate market. The market is largely viewed as stable and attractive, which bodes well for future investment and development. Ultimately, the recovery Canada has experienced is now maturing.

When the Overall Sentiment Index for Canada is compared to that of the United States, there are similarities, though the Canadian Indices continue to reflect this country’s stronger fundamentals. The Overall U.S. Sentiment Index came in at 69 this quarter (down from 77 last quarter), reflecting a continued, though also decelerating positive trend. The key difference is that the U.S. index showed a score of 68 for future conditions compared to Canada’s 61, suggesting respondents believe the U.S. real estate market still has more room for improvement. This is no surprise, considering U.S. market conditions continue to be weaker than Canadian conditions.

In interviews, respondents reported strength in a variety of asset classes and regions, though there is some suspicion about the possibility of increased risk. One respondent noted, “Interest rates are low, job creation is good, and there’s growth in the market. I’m still surprised by the strength of the market.” Another more cautiously stated that “Prices are suspiciously high in comparison to fundamentals. A lot of people want to say that we’re in a bubble, but I’m not sure.”

Asset Prices Real estate asset values have continued to trend upwards, with a broad group of respondents (87 per cent) reporting increased asset values over the past year.  However, most (55 per cent) are expecting flat pricing going forward and an increasing group (now 12 per cent) is expecting a mild decline in asset values. As one respondent told us, “asset prices have really moved up as cap rates have compressed. I can’t see things tightening up that much more though.”  With cap rates at historically low levels in many sectors, asset prices are rising for different reasons; many believe it is due to low supply and significant amounts of capital seeking to be placed. As one respondent stated, “There’s a shortage of commercial product for sale, so as a result, cap rates are low. People are looking to buy and it’s definitely a sellers’ market.”

Debt Markets Availability of debt capital continues to be seen as a source of strength.  According to respondents, debt is as available as it has ever been and has shown significant improvement in the last year. One respondent echoed this notion by saying, “…we’ve been able to get [the debt] we need. It’s definitely better than last year.” However, this very strength leaves less room for future improvement, and, as a result, the majority of respondents (57 per cent) expect debt capital availability to remain the same in the coming year. Resonating a common theme, it appears that the U.S. has more room for future improvement in regard to debt availability, as the majority of their respondents believe conditions will get better in the next year.

Equity Markets Similar to debt, the availability of equity capital is seen to be strong and positive, such that there is little scope for further advancement. Equity availability has certainly improved over the past year, with many respondents highlighting the healthy state of the Canadian market. One participant stated, “Many of the people within our network are still seeing continued interest from the equity capital markets.” Once again, the majority of Canadian respondents (53 per cent) expect equity capital availability to remain about the same over the coming year, while most U.S. respondents expect to see continued improvement.

The “REALpac/FPL Canadian Real Estate Sentiment Survey” is directly comparable to the “Real Estate Roundtable Sentiment Survey” in the U.S. (also conducted by FPL Advisory Group, using an identical methodology). To download a copy of the report, go to

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