Land investments lose lustre

Record-setting year for commercial real estate sales

After bidding up land prices over the past few years, investor interest in Ottawa development properties appears to be moderating, according to one broker.

Ottawa’s historic appeal as a stable government market, coupled with inexpensive access to capital, helped drive up demand for quality real estate assets in recent years. However, a shortage of properties offered up for sale forced investors to look beyond the traditional office, industrial and retail markets and seek out development land opportunities.

The value of local investment land sales more than doubled last year, going from $116 million in 2011 to approximately $294 million in 2012, according to statistics published by real estate services firm CBRE.

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In March, Claridge Homes was believed to have set a new record for local land prices when it bought a 15,681-square-foot lot at the corner of Preston Street and Carling Avenue for $9.02 million, or $575 a square foot.

In the second half of the year, however, activity started to cool, says one broker.

“We’ve seen a bit of a pullback in land,” says Nico Zentil, a senior sales representative at CBRE.

“The number of bids that show up on the table for some of these offerings is not as deep as it was a year ago.”

He says it is hard to pinpoint a single cause, but suggests it could be related to rapidly escalating prices or a perception among investors that the residential development market has matured.

His firm is predicting land sales will fall below 2011 levels this year, dropping to $106 million.

Overall sales across all asset classes more than doubled in 2012, reaching approximately $2.2 billion.

Nathan Smith, a senior vice-president in Cushman & Wakefield Ottawa’s capital markets group, says 2012 was a record year for Canada’s capital, eclipsing the $1.8 billion in sales recorded in 2007.

He adds that Ottawa capitalization rates – one measurement of return that’s calculated by dividing a property’s net operating income by its purchase price – were also driven to record lows.

But despite the cap rate compression, Mr. Zentil says real estate remains an attractive investment because of the spread over the returns generated from fixed-income assets such as bonds.

Real estate becomes even more appealing when using other metrics such as leveraged return rates that take into account the currently low cost of capital.

“Investors can afford to pay lower cap rates given the attractive financing rates,” he says.

While Mr. Zentil says his sector is “carrying good momentum” into 2013 from last year, CBRE is predicting investment levels will decrease significantly this year, to $734 million.

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