Canadian Lawyer InHouse

A trusts selected a two-million-square- foot skyscraper in the heart of Toronto's financial district to formally announce their Canadian arrival in style. When Scotiabank sold its 68-storey swanky hotel or a stately home would normally do the job for a reasonable coming out party, once the highlight of high soci- ety calendars around the world. But this summer, real estate investment Scotia Plaza headquarters for a record- breaking $1.27 billion in June, Dundee REIT and H&R REIT who emerged from the pack as winners, see- ing off rival bids from pension funds and other institutional investors; traditionally the owners of such landmark properties in this country. "I think we're seeing an incredible it was maturation of the REIT market here in Canada that is creating all kinds of work for lawyers," says David Ehrlich, a partner in the real estate group of Stikeman Elliott LLP' amendment to the Income Tax Act that allowed closed-end mutual funds to hold real estate, and George Valentini, a former chair of the real estate practice group at Osler Hoskin and Harcourt LLP, says the intervening two decades have given investors a chance to understand and gain confidence in the sector. "There' s Toronto office. REITs have their roots in a mid-1990 The idea now is that they work, and the people behind them, like Michael Cooper at Dundee, and Rai Sahi at Morguard, are not fly-by-nighters. People have done well by them," Valentini says. "REITs can now raise money and be incredibly competi- tive, perhaps even more so than pension funds. That' s a comfort level with REITs. and the pensions didn't." "Any good REIT who wants to raise s why they got Scotia Plaza money can do a deal in 10 minutes. And if you want to get one started, dealers are almost falling over themselves to get a hold of it," says Ehrlich, who adds that many have been quick to take advantage of easy access to capital. He sees the Scotia Plaza deal, along with Brookfield Office Properties' 2010 conversion of most of its Canadian buildings to a REIT, as indicative of a new focus on quality assets over quantity. "In the early stages of REITs in Canada, the marketplace didn't really discriminate a whole lot in terms of quality of assets, so that size seemed to be more important," Ehrlich says. "Now the marketplace is sophisticated enough to say, OK, we'll take less yield from this because of the quality of the buildings and the quality of the income. says REITs are struggling to keep up with investor demand. With just 10 per cent of Canadian real estate publicly securitized, he says the market is still relatively small compared with the U.S., where REITs have been up and running for at least 30 years longer than Canada, and other countries, such as Australia and Singapore, where more than a third of all real estate is publicly securitized. "There' At Goodmans LLP, Stephen Pincus " hunger for this product," says Pincus, the chairman of Goodmans' REITs and income securities practice. The current low interest environment s been a great is doubly beneficial for REITs. In addition to providing a solid base for the real estate market, they also make REITs an attrac- tive port of call for yield-seeking investors. "The less money you can get in the bank with your GIC, the more you are looking for other forms of yield, and real estate has been the easiest way to get access to it," Pincus says. Strong performers Underlying the popularity of REITs is a confluence of favourable fundamental conditions that have market analysts like Alex Avery running out of superlatives in describing their performance. "They are doing exceptionally well, chief economist of CIBC World Markets, who cites the S&P/TSX REIT Index as evidence. For the last three years, it has consis- " says Avery, already up 10 per cent, while the compos- ite index was flat. "You've got high occupancy rates and rising rental rates, an accommodating interest rate, and a disciplined and pru- dent development industry that has kept supply of new property very constrained, despite the strong demand, look strong compared with similar prod- ucts abroad, according to Avery. Canadian developers learned their lesson after get- ting stung by oversupply in the 1990s real estate slump, Avery says. Since then, a conservative approach to development has helped keep the real estate market hot across sectors and across the country. "I think we have some preferred mar- Those factors make Canadian REITs " Avery says. kets and less preferred in Canada, but you're choosing between winners," says the bullish Avery. In July, a global survey by Investment Property Databank Ltd., singled out Calgary as the best place in the world to invest in commercial real estate in 2011. Rental income and higher property values in Calgary combined to produce a return of 21.6 per cent, according to the survey. San Diego followed on 19.5 per cent, with New York and London trailing behind on around six per cent. Robert Aziz, the chief legal officer at Oxford Properties Group, says the city is on his radar for future projects. "Calgary is a very hot market right now, driven by the oil and gas boom. Rents have almost doubled since last fall, and it' and demand issue. There's so many people looking for office space, and there just isn't any, tably comes high prices, and after a three- year spending binge, Avery says REITs have slowed their acquisition rates. At First Capital Realty, general counsel " he says. But with a hot real estate market inevi- tently and spectacularly outperformed the composite index. In 2009, the REIT index registered a total return of 55 per cent, beating the overall market by around 20 percentage points. In 2010, it was up 23 per cent, five points better than the com- posite. 2011 saw the TSX overall lose nine per cent of its value, while REITs were up 22 per cent. By June 2012, REITs were Roger Chouinard says the firm has turned its attention to its existing supermarket and drugstore-anchored shopping centres in across Canada. "Property values are at, or very close to, a peak at the moment. What the financing markets are doing for us is adding more competition for buying properties, and increasing prices. With the added competition, it just means we're even more selective in our acquisi- tions," he says. "We are reinvesting our CANADIANLAWYERMAG.COM/INHOUSE OCTOBER/NOVEMBER 2012 • 29 s a supply

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