Foreign buyers seek shelter from the storm

As headwinds rise in Brexit’s wake, European investors join those from China seeking a safe real estate haven in a yield-starved world

The Royal Centre office tower in downtown Vancouver sold to European investor Klaus-Michael Kuehne of Germany: local agents don’t see the $425 million deal as a harbinger of a big wave of European investors | Chung Chow

“Canadian commercial real estate is at the intersection of two powerful investment trends: the search for hard assets in order to generate yield in a yield-starved world and Canada’s increasing status as a safe haven in a world of growing geopolitical uncertainty,” observes Paul Morassutti, executive managing director with CBRE Ltd., in assessing the investment outlook for Canadian real estate in 2017.

In Vancouver, commercial investment transactions totalled $8.1 billion in 2016, or 23 per cent of the national total of $34.7 billion. This is expected to continue in 2017, with foreign players remaining a key element.

CBRE reports that foreign buyers accounted for 27 per cent of all worldwide investments worth $10 million or more in 2016, with Chinese investors representing the majority.

CBRE broke down the sources of foreign investment in Canadian commercial real estate through the first half of 2016.  The findings proved somewhat surprising.

“When you break down the sources of foreign capital  in 2016, buyers from China and Hong Kong make up 65 per cent of foreign capital transactions by volume,” Morassutti says. “However, what is even more interesting is nearly a third of the total foreign investment volume came from European buyers. This is more than double the historic five-year average and appears to reflect the growing geopolitical uncertainty in the EU [European Union].”

While new restrictions on capital outflows from China could put a damper on activity and the U.K.’s decision to leave the European Union turning investors’ attention to North America, many in Vancouver expect Asia to remain the leading source of investment in 2017.

Jim Szabo, who with Tony Quattrin leads CBRE’s national investment team in Vancouver, sees no indication that investment from Europe will edge out Chinese capital. European investors remain small players, engaging in just one of last year’s big deals, he notes.

“Royal Centre – that was the only one,” Szabo says. “It was a big one, it was $425 million, but it was one deal, whereas if you’re looking for a trend, I would say the mainland Chinese are more of a trend than one European buyer, which is more of an anomaly.”

The past three years have seen Chinese investors push foreign involvement in Vancouver commercial real estate deals from 15 per cent to 44 per cent.

“I don’t see that going higher – it might stay at that level for 2017, in that 40 per cent range,” Szabo says, pointing to the restrictions facing Chinese capital flows. He expects the proportion to decrease further in 2018 and 2019, but remain relatively high.

“Over the next two to three years I would see that mitigating, but not pulling right back,” he says. “A lot of these groups have their money out of China already, sitting in accounts outside of China, so I still see some relatively steady investment here.”

CBRE’s national outlook underscores the “ample reasons to believe that Vancouver investment activity will be sustained,” including the flight to safety and quality among global investors as well as interest in gateway cities with rare properties.

This bears out what Jon Ramscar, senior vice-president with Jones Lang LaSalle (JLL) and leader of its capital markets group in Vancouver, sees among investors.

“We just don’t have very many opportunities to meet the demand of that capital,” he says, pointing specifically at inflows from Asia, which – despite uncertainties in Europe and even the U.S. – continue to trump alternative sources. “The scale and nature of the Asian market has been on the increase. I wouldn’t say the European investment has changed from a year-on-year typical appetite.”

Still, investors from China are cautious.

“We’re in a funny place right now with the regulations around Chinese capital outflows,” Ramscar says, noting that interest remains high and many deals – but not all – are still happening. “We’re still seeing money coming through and investments taking place, and we suspect that’s because a lot of that money was already transferred in advance … but there have been some large-scale transactions just [been] before Christmas that have either been put to a halt or they’ve just put on the side burner till things pan out with the regulations.”

The deferral of purchases means that a fresh wave of capital could pour into Vancouver in the second half of 2017 as the new rules of the game become clear.

The kinds of properties being sought are increasingly those with future redevelopment potential, often as transit-oriented mixed-use sites with a residential component.

This has long been the case with retail properties, but investors are now targeting office properties, with JLL handling listings such as Queens Court in New Westminster and CBRE lising Pacific Business Centre near Lansdowne mall in Richmond.

“We’re seeing some offerings at pretty aggressive prices for office buildings, on the basis of future higher and better use,” he says.

Tenants have little to worry about in the interim, however, as most owners, whether domestic or foreign, are hiring professional management firms to oversee their acquisitions.

Most are taking a keen interest in making the most of their purchases rather than simply finding a safe haven, Szabo adds.

“These groups are not just parking money,” he says. “They’re actually developing properties.”