A dearth of available commercial real estate in Canada has profit-hungry investors eagerly eyeing opportunities in the Prairie provinces.

A shortage of such properties in Ontario, Quebec, British Columbia and Alberta has investors looking to less expensive provinces such as Saskatchewan, where commercial real estate can be had for in cities such as Saskatoon or Regina for $300,000 to $1 million on average, says Tom McClocklin, managing director of Colliers McClocklin Real Estate in Saskatoon.

"It's really tough for investors to find product to buy, which is why they're now looking at Saskatchewan. It's turned into a bit of a feeding frenzy out there," says McClocklin.

"In the past, institutional investors - including the big pension funds and insurance companies - have shied away from Saskatchewan, mainly because there wasn't a lot of big properties for them to buy and there were concerns about our economy," he notes.

Jeannie Armstrong, Business Edge
Tom McClocklin, managing director of Colliers McClocklin Real Estate, says the REIT market has never been stronger.

Now the tide has turned. McClocklin says there are a number of ways that individuals can invest in commercial real estate, particularly in real estate investment trusts (REITS) and publicly traded real estate companies.

In Canada, REITS now own vast holdings of commercial real estate, including shopping centres, office buildings, apartments, hotels, industrial facilities and care homes. Money continues to change hands as REITS snap up expensive commercial properties across the country.

Recent investments by REITS in Saskatchewan show that confidence in the province's economy is much stronger today, notes McClocklin.

One of the largest Saskatchewan transactions took place a year ago when Toronto-based Borealis Retail REIT, purchased the province's two largest shopping centres, Midtown Plaza in Saskatoon and Cornwall Centre in Regina, for $199 million.

On July 21, Whiterock Real Estate Investment Trust (Whiterock REIT) announced its purchase of three government-leased office buildings in Regina, for approximately $18 million. The three office buildings net approximately 178,500 sq. ft. of leasable space; 92 per cent of this space is leased long-term to provincial government and credit tenants.

On Aug. 3, Lanesborough Real Estate Investment Trust (LREIT) announced an even larger investment, with the purchase of Luther Riverside Terrace in Saskatoon.

The 181-suite senior housing complex, which features a blend of independent living rental suites as well as a 24-suite intermediate care home, was purchased by LREIT for $24 million.

Former property owner LutherCare Communities will continue to manage the complex and provide services to tenants.

By investing in a REIT, the average individual investor has an opportunity to get in on some big-ticket properties, without paying the big-ticket pricetag, says McClocklin.

Investors not only benefit from steady dividends, they also enjoy the potential for moderate, long-term capital appreciation.

There are many other options besides REITS, McClocklin notes."The first way is through direct investment - actually buying one or more pieces of commercial real estate. The types of properties this includes range from apartment buildings to office buildings, industrial properties and everything in between."

Variations on direct investment include private limited partnerships and syndication. "Syndication is where you get a group of people together to invest directly in a single property or a few pieces of real estate," says McClocklin.

Partnerships and syndicates are becoming more popular as commercial property values rise, says Maggie Robertson, chair of the Saskatoon Real Estate Board's Commercial Council.

"Because the real estate market has been so active, many people can't get in at the investment level they want. An option is to join hands with other people - form a partnership - and that way be able to get into a higher priced product range."

Meanwhile, a REIT's income is derived from rents paid to owners of commercial properties. Many of these tenants have long-term leases, providing a predictable revenue stream.

"A large portion of a REIT's income is distributed back to the unitholders through distributions. So investors get the benefit of an income stream, as well as the potential for capital appreciation," says McClocklin.

In 2004, there were 26 REITs in Canada, providing average returns of 15 per cent. With new REITS being established all the time, McClocklin says the number of REITS in Canada will be significantly higher by the end of 2005.

"These REITS are diverse and sophisticated - offering a broad range of real estate holdings across the country, with professional management.

"Some of them are very specific to product types. There are hotel REITs, office REITs, retail REITs, apartment REITs. Others are more general. You can pick and choose the type of REIT you want," says McClocklin.

"Investment trust mutual funds provide even greater diversification. These mutual funds represent a mix of investments - one part real estate, another part oil and gas. Through an investment trust mutual fund, you can reduce investor risk even further."

A third way to expand your investment portfolio in the commercial real estate sector is to buy shares in publicly traded real estate companies, says McClocklin. "These are individually publicly traded units, available in any denomination."

In January, Standard and Poor's announced the inclusion of REITS and income funds in the S&P/TSX Composite Index. Previously, these funds were listed in three separate indices, including the S&P/TSX Capped REIT Index.

The announcement was heralded as good news by the Canadian Institute of Public and Private Real Estate Companies (CIPPREC).

During the announcement, executive director Michael Brooks stated, "We hope that this announcement by S&P will further encourage investors to consider the dynamic and growing income trust and REIT sector as part of their investment portfolio."

McClocklin explains, "Ten years ago, real estate wasn't considered a mainstream type of investment. It is now. People have confidence in it. It's proven to offer a stable cashflow. Properties have been rising in value because of low interest rates.

"It's proven to be a very stable, good performing investment sector to go into."

(Jeannie Armstrong can be reached at jarmstrong@businessedge.ca)