ARTICLE | February 29, 2024

As the global real estate outlook improves, Canadian real estate is well positioned as a lucrative and stable investment class on the international stage. The country’s strong fundamentals have historically made Canada attractive to foreign investors, and RSM expects the draw will become even stronger.

According to MSCI Real Capital Analytics, foreign investors accounted for 32.5% of Canada’s real estate buyer composition in 2023. While private investors continue to account for the majority of the real estate buying composition at 51.6%, listed REITs and institutional investors both disposed of assets than they sold, resulting in net acquisitions of minus $5.7 billion for REITs and minus $2.5 billion for institutional investors, respectively

Continued appeal to foreign investors

According to Fiera Real Estate’s recent white paper titled "Canadian Real Estate, the World’s Best Kept Secret," the country's consistently high performance across categories such as government and banking culture, productivity/technological progress, population growth and indebtedness places it at the forefront of investment destinations among G7 nations. The tight concentration of Canada’s banking system, with only five major banks and a handful of other banks, creates an oligopoly structure that is centrally regulated and inherently less risky compared to its U.S. neighbor due to Canadian bank conservatism when it comes to lending and liquidity. While the U.S. saw three major bank failures in March 2023, Canadian banks showed resiliency through 2023, the pandemic and the global financial crisis of 2007-09. Fiera assigned Canada a composite score of 5.60 in June 2023, suggesting that Canada has sustained its lead over the past 15 years. This longevity showcases the country’s enduring appeal to global investors, positioning Canada as a viable substitute for the U.S. as an investment destination.

The Economist Intelligence Unit's Global Liveability Index for 2023 reinforces the attractiveness of Canadian real estate, with Vancouver, Calgary and Toronto ranking fifth, seventh and ninth, respectively, out of 173 cities globally in terms of overall livability. The index ranks 173 cities across five broad categories: stability, health care, culture and environment, education and infrastructure. These survey results underscore the robust fundamentals supporting investment opportunities in these Canadian cities.

At first glance, Canada’s negative GDP growth in the third quarter of 2023, with an annualized rate of minus 1.1%, coupled with another decline in per capita GDP for the fifth consecutive quarter, underscores the economic challenges the country currently faces. However, Canada’s unique approach to economic growth is rooted in its commitment to population growth. Canada’s population grew 1.1%, by 430,635 people, in the third quarter of 2023, bringing its total population to 40,528,396.

The government of Canada is maintaining its growth target of 485,000 permanent residents for 2024 and 500,000 in 2025 and 2026. The unemployment rate is expected to rise to 6.8% as population growth outpaces job growth, an obvious impact stemming from mass immigration. Canada’s housing stock is the lowest per capita in the G7. Population growth is expected to bolster demand across a variety of soft infrastructures in society, positioning Canada as a promising landscape for discerning global investors.

Investment opportunity awaits, as distress is on the horizon

While Canada's real estate market thrives, a nuanced landscape is emerging, marked by growing distress across segments. Twelve-month sales volume growth was down 38% across office, multifamily and retail sectors, offset by a 17.4% increase in industrial. The fallout from the era of low interest rates is felt by operators facing higher capital costs and unanticipated shifts upward in capitalization rates. Throughout 2022 and 2023, cap rates continued to rise across the core sectors (multifamily 3.8% to 4.1%, office 6.8% to 6.9%, retail 5.0% to 5.2%, industrial 5.0% to 5.2%). Low transaction volume, coupled with market uncertainty that is expected to continue for the first half of 2024, makes it challenging to set valuations.

The Bank of Canada’s Senior Loan Officer Survey, which collects information from selected financial institutions on a quarterly basis, showed the balance of opinion over the state of overall business lending conditions in Canada increased to 13.2% in the third quarter of 2023, the highest since the second quarter of 2020. While some REITs are seeking approval to remove debt ceilings, smaller players may not have strong enough relationships with their lenders, particularly lenders in the secondary market, to leverage up further and meet tightened covenant requirements. Similar to the situation south of the border, it is expected that some players will default, and be forced to sell at a discount or a potential loss. If lenders take back the assets entering receivership, there will be limited buyers, which is leading to a reduction in price expectation. This lag effect may continue to be felt for the next 12 to 18 months, presenting a unique opening for investors, domestic and foreign, who are strategically sitting on the sidelines waiting for the opportune moment to deploy capital.

Pension investment debate opens doors to foreign capital

Tensions surrounding Canadian pension plan investments are simmering, which creates a window of opportunity for foreign investors. Canada’s 2023 Fall Economic Statement underscored the government's commitment to collaborating with Canadian pension funds in stimulating more domestic investment opportunities. Meanwhile, Canadian pension plans face pressure from internal investment committees to diversify both geographically and by asset class to enhance returns.

At the 2023 Toronto Real Estate Forum, Tyler Seaman, executive vice president of Canada at Oxford Properties, noted, "I can only speak for Oxford and OMERS, our shareholders, but 36% of Oxford's equity is invested in Canada." He added, “Canada represents 2% of global GDP. We are disproportionately invested in Canada and happily so.”

While there are benefits to domestic investment, including no foreign exchange risk, Seaman’s sentiment speaks to the issue of Canadian pension plans’ need to diversify their investments, creating an opening for foreign investors to enter the market and capitalize on potential discounts to net asset value in Canada.

The takeaway

As the global outlook improves, Canadian real estate is set to continue its ascent on the international stage as a lucrative and stable investment.

Fueled by a history of strong fundamentals, the nation's consistently high performance, as evidenced by Fiera Real Estate's white paper and The Economist Intelligence Unit's Global Liveability Index, positions Canada as a top-tier investment destination—and a viable alternative to the U.S.—for real estate investment. While challenges such as emerging distress and the pension investment debate add complexity, they also create unique openings for both domestic and foreign investors to strategically navigate and capitalize on the diverse landscape, reinforcing the resilience and potential of Canada's real estate market.

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