High property prices in Western Canada will help spur international investment in downtown commercial markets across the country, say real estate industry leaders.
"We're going to see more pools of capital ... heading to the West, depending on the requirements or the nature of the investor," said Avtar Bains, senior vice-president with Colliers International in Vancouver, at a recent real estate forum in that city.
But Bains indicated it's also common for investors to look at Alberta and Central Canadian properties instead of Vancouver, because of the West Coast city's high property prices and low profit margins.
Downtown property prices and rental rates in Vancouver, Calgary and Edmonton have risen dramatically, while Ontario's growth has been much slower.
Some real estate analysts say the higher prices in the West are prompting investors to look for deals that offer greater profits in Ontario.
Bains said although Canadian real estate prices have "gone crazy," international investors are still attracted to Canada because of favourable economic conditions.
However, he contended Canada's highly efficient real estate "machine" is being jeopardized by a lack of inventory because investors hold on to their properties.
"It's a huge potential problem in Canada ... I think we're going to get supply, but we're not going to get enough supply to satisfy the demand."
The forum panelists echoed the claims of a leading economist, who told the conference B.C. and Alberta will guide Canada's economy into the next decade.
"It will be a horserace between B.C. and Alberta over the next five years," said Warren Jestin, vice-president and chief economist for Toronto-based Scotiabank Group.
But Roy Lall, an associate director of mortgage production with Toronto-based MetLife who attended the forum, predicted the Ontario market and its real estate sector will be also able to rebound.
"I think at the end of the day, Ontario's economy is such a huge economy compared to Western Canada," said Lall. "The scale of it has not really shone through."
Lall, who oversees B.C. and Quebec for his company, said Ontario real estate industry executives are scratching their heads as to why eastern properties have not performed up to expectations. But, he added, international investors obviously feel they can create value from under-performing sites.
"Maybe they know something we don't," said Lall.
John O'Bryan, managing director of Toronto-based TD Securities Realty Group, said Eastern Canada is adding a lot of "value push" because American and other international investors expect rental rates and other factors to improve, based on their experience with other struggling real estate markets.
Zelick Altman, managing director for Canada for LaSalle Management Group, indicated Canadian markets appeal to international investors because of even higher property prices in large cities such as Chicago and favourable economic conditions.
Bains noted Canadian institutional investors are also looking beyond our borders more often.
"So we've got this capital colliding all over the place - just another reason why, as time marches on, we're not just a Vancouver marketplace," said Bains. "We are being linked (and) inter-linked with global markets more and more every day."
For the next nine to 18 months, he said, accumulating properties will be the key strategy. But a decade from now, in keeping with the last three cycles, the opposite will be true. The parts will be greater than the whole.
If you've got scale, you've got more liquidity," said Bains. "The bigger, the better."
But Altman said something will happen in another capital market, possibly a price change, that will generate more inventory.
Many Vancouver investors may also sell in 2009 in hopes of capitalizing on the 2010 Winter Olympics.
O'Bryan said another $3 billion in investment capital is back in play in the market after Ottawa revised real investment trust (REIT) taxation rules.
"The medium-sized REITs or small REITS will be determined to grow unless they're waiting, I guess, to be taken over when they don't want to," said Altman.
But Eric Carlson, president and CEO of Vancouver-based Anthem Properties Ltd., doubted the REIT rule changes will be as harmful as feared.
"I think the impact of this legislation as it impacts REITs ... won't be as draconian as originally thought," said Carlson.
Meanwhile, Scotiabank Group's Jestin said the B.C. and Alberta economies are benefiting from growing resource demand from China, India and the rest of Asia, high energy and commodity prices, and huge expansion in the environmental sector.
"B.C. and Alberta have moved up to the top, in my view, because of the things that will exist in the next few years in the economy," said Jestin.
"Ontario and Quebec have slowed down significantly. I would expect those economies to be (hovering) around down to two- or 21/2-per-cent growth - at least a percentage point or as much as two percentage points below what you're going to see in Western Canada."
Provinces west of the Manitoba-Ontario border are expected to thrive while provincial economies east of that line will struggle, he predicted.
Jason Clemens, a director of fiscal studies with the Fraser Institute, a Vancouver-based thinktank, said B.C., Alberta and Saskatchewan government policies are helping Western Canada's strong economy.
"It's not just about commodities," said Clemens.
He said the B.C., Alberta and Saskatchewan governments have created the right investment environment by reducing or eliminating corporate or personal income taxes - despite their ruling parties' distinct political differences - while Ontario's government has gone in the opposite direction.
He predicted Alberta, B.C. and Manitoba - in that order - will enjoy the strongest growth in 2008.
The four Western provinces will have the lowest unemployment rates while Toronto will remain around the national average.
(Monte Stewart can be reached at email@example.com)