Open-end real estate funds wield considerable clout in the Canadian investment landscape. Recently released results of REALPAC’s inaugural open-end fund survey show that 15 funds, under the auspices of 13 organizations, collectively held more than CAD $143.1 billion in assets under management at the end of 2018. That compares to a market cap of CAD $112.7 billion for TSX-listed real estate companies on the same date and CAD $40 billion in assets under management reported by 22 participants representing 50 funds in REALPAC’s 2018 non-listed closed-end fund survey.
“REALPAC’s continued commitment to transparency and professionalism in the real estate investment market has informed its decision to undertake the 2019 open-end fund survey to build on the market information obtained from its closed-end fund surveys over the last three years,” states accompanying commentary from the organization representing many of Canada’s largest real estate companies, funds and institutional investors.
The defining features of open-end funds — private investment vehicles that typically hold long-maturity income-generating assets and allow for contributions and withdrawals on an ongoing basis — are well matched to investors with long-term needs for stable, predictable returns. In contrast, closed-end funds have a specific investment period, set timelines for distributing all cash flows, and typically a higher proportion of value-added assets — all making for a more volatile mix that can yield impressive or more disappointing payouts depending on market conditions on the termination date.
Seven of the surveyed open-end funds report net asset value (NAV) in excess of $1 billion, with highest NAV surpassing $6 billion. A NAV of $16-million bottoms out the scale, but it falls well below four funds reporting NAV in the $251- to $500-million range at the next rung up.
Data collected between August and late November last year reveals open-fund contributors heavily weighted to institutional investors with fund managers generally favouring multiple asset classes, but more wedded to core strategy — based on stabilized, fully-leased income-producing assets — than their peers overseeing closed-end funds. While one fund reported a predominantly non-core focus in excess of 90 per cent of investment, the greater majority — 13 of 15 — have core investment in the 76 to 100 per cent range.
“It’s not surprising that a core strategy is employed by a majority of the open-end funds because of the stability of the assets, which provide reliable cash flow and better liquidity for investors,” the survey commentary notes.
Other distinguishing differences emerging from REALPAC’s two-track surveys include: open-end funds’ greater propensity to invest outside North America, with 55 per cent of investment allocation in Europe compared to a European stake in the 24 per cent range for closed-end funds; and a lesser reliance on leverage, with most funds setting a maximum threshold in the 31 to 40 per cent range versus the majority of closed-end funds with maximum thresholds between 51 and 75 per cent.
Open-end fund managers can also typically draw on a long record of deal-making. Five funds report they have made between 51 and 75 investments; two have made between 76 and 100 investments; and three have made more than 100 investments.
“With the characteristic of open-end funds being long-term vehicles and the fact that some of the participating funds are a few decades old, it is not surprising that the number of investments made fall on the higher end of the scale,” the commentary notes.
Fund managers typically steer the interests of a greater number of investors than in a closed-fund scenario. Eight of 15 surveyed funds tallied more than 100 investors, with the largest pool topping out at 1,662. Six other funds reported between 11 and 75 investors, while just one fund counted fewer than 10.
Corporate pension funds were the most predominant investor type — represented in eight of the 15 funds, with a contribution stake ranging from 4 per cent to 63 per cent across those funds. In most cases, though, corporate pension contributions equated to less than 50 per cent of investment.
Public pension funds were the sole investor type in three of the funds, while contributing to a total of seven of the funds at levels ranging from 100 per cent to 4 per cent. Endowments and foundations were also active investors, represented in seven funds but with a contribution stake below 50 per cent in six of those cases.
Insurance companies, funds of funds, direct contribution pensions, investment banks and fund managers themselves add to the institutional investor mix, along with the assorted “other” category, defined as “high-net-worth investors, corporations, foreign charity, trusts, group retirement solution platforms and general institutional investors”.
Meanwhile, retail investors figured in six of the funds, at levels ranging from 95 per cent to 0.3 per cent. Although only three of the 15 funds report any foreign capital investment, one of those is 100 per cent subscribed by foreign investors.
Nine of the surveyed funds are targeting new development, which is generally in sync with sector-wide trends. MSCI’s historical overview shows development as a growing component of capital value across the Canada Property Fund Index over the past decade, hitting a high of 9.5 per cent in 2019, up from a low of 3.9 per cent in 2012.
Five funds appear to be sticking in that range with targets of five to 10 per cent, while the remainder are poised more aggressively, including three with targets in 16 to 20 per cent range. That aligns with challenges fund managers report facing, including “the competitive landscape for product, which results in a challenge to find institutional grade real estate in Canada.”
Currently within Canada, Ontario, British Columbia, Alberta and Quebec capture the vast share of open-end fund investing, which is largely directed to the industrial, office, retail and multi-residential asset classes. All 15 funds report holdings in Alberta, but more investment occurs in Ontario and British Columbia despite the slightly lower participation of 14 funds. Notably, 11 funds hold upwards of 40 per cent of their portfolio in Ontario, while no fund has a similarly sized share in Alberta.
Outside the big four, Atlantic and prairie provinces host a modest level of fund activity. Nova Scotia tallies the highest number — five — while New Brunswick receives the highest level of investment from any one fund, at 12 per cent. Open-end funds are entirely absent from Prince Edward Island, Yukon, Northwest Territories and Nunavut.
Funds show varying commitments to the four predominant asset classes, but office and industrial capture both the highest number of investors and the largest share of their investment. Fourteen of 15 funds channel 86 per cent to 3.8 per cent of total investment into industrial properties. Thirteen of 15 funds invest in office, with allocations ranging from 71 per cent to 15.3 per cent of their total investment.
Land, hotels and seniors residential projects make up a tiny fraction of a minority of open-end funds’ holdings. There is no investment in student housing.
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
