Cap rate predictions for 2013

The simple and resounding answer seems to be, not too much.

While analysing rates on a national basis is difficult, the general feeling among investors and analysts is that rates will remain relatively low across Canada.

A report presented by the Urban Land Institute and PwC, Emerging Trends in Real Estate 2013, reveals that the lowest cap rates can be found in commercial and multi-residential sectors.

“Survey respondents expect little further downward movement in ‘low-as-you-can-go’ cap rates, especially for apartments, regional malls and downtown office space. The exceptions will be for prime development sites in and around downtowns, especially for stores,” the report said.

But are low cap rates necessarily a good thing? The capitalization rate is determined when the net operating income (NOI) is divided by the purchase price, or current value, of the asset.

For investors concerned with monthly rental income, a higher cap rate – signalling lower operating costs and thus higher cash flow – is desirable. But low cap rates signal the value of the acquisition has risen, allowing money to be made when selling the asset.

Given the current, most investors are focused on maximizing the cash flow today and not necessarily on upping property values when buyers are fewer and farther in between.

“With prices stabilizing and buyers having a more difficult time buying properties that puts more demand on rentals, which increases rental rates in key neighbourhoods and key markets,” says investor Paul Hecht. “I would say Toronto is neighbourhood driven; we have over four million people here, it’s like putting Calgary, Edmonton, Victoria and Ottawa all in one city. There will be pockets which won’t do anything, and there will be pockets that perform very well.”

Still, many investors feel that lower cap rates will yield the biggest returns.

An investor favourite in recent months, Hamilton is predicted to provide excellent rates of return.

“I think the Hamilton market is going to continue to see a lot of investors, and I think the cap rates are going to remain quite low,” says Shawn Maher, investor and developer. “We’re finding every building that we put up in Hamilton right now we’re getting multiple offers on, and they’re going for a cap rate that is a lot lower that what it would normally go for. I would really predict that Hamilton, even though they’re predicting a 20% drop in real estate over all, the prices are so low that I think it is going to be a very low environment for cap rates.

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