Property investors face cap rate challenges

by Vernon Clement Jones17 Aug 2015
The party’s over for Canadian investors in American real estate – well, almost over, if you’re talking cap rates.

Cap rates. That key metric for real estate investors has hit a plateau across both residential and commercial segments in the U.S., according to one leading portfolio manager, considered a guru by large-scale private investors looking to time the market.

Looking at the price recovery across most major markets since the dark days of the recession and the very real possibility of a rate hike this fall, Timbercreek Asset Management portfolio manager Corrado Russo reckons cap rates – the ratio of net operating income to property asset value – have already flat-lined.

On the bright side, he isn’t going so far as to suggest an increase in either the short or medium term.

That analysis comes as a growing number of Canadian investors grapple with the decision to continue holding onto rental property bought in the dark days following the 2008 market crash or whether to cash out at what may well be a market high.

Russo, in speaking to the Financial Post, seems to be of the mind that greener – more cap-rate rich – pastures lie outside North America. Those chasing opportunities for future price growth and years of rock-bottom carrying costs should look across the Pond.

“We’ve obviously seen a pretty significant decline in interest rates across (Europe),” he said, pointing to “0 per cent policy” of a growing number of central banks. “Our view is this is driving cap rates lower and asset prices higher. We’ve already seen that start to happen and we think it is going to continue.”

But before Canadians pull up anchor in the U.S. and set sail for Spain, the UK or even Bulgaria, experts have a revelation to share with those funding purchases with cash or using Canadian financing sources: their cap rates in the U.S. actually has more room to fall in the medium-term.

That forecast has everything to do with expected rent increases across many American hotspots as local economies continue to rev up. There is also the very real possibility property prices will continue to climb in markets such as Florida, Nevada and Ohio.

Taken together, those two factors may recommend staying in the U.S. a bit longer, suggest seasoned industry players.

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