Foreign investment in Canada’s commercial real estate market is increasing as it provides safe, liquid investments in almost all sectors and asset classes across the country. Investors have demonstrated a willingness to pay a premium for safe and stable commercial real estate investments in a time of global economic uncertainty.
Here is a snapshot of some Canadian real estate indicators as provided by CBRE Global Research and Consulting in its Q2 2013 MarketView: 2012 was a near record year in Canadian real estate with 2013 maintaining healthy activity; as at the end of 2012, Canadian pension funds had increased their real estate allocations to the highest levels on record, through both development and investment; real estate transaction volume for the first two quarters of 2013 was C$14.7 billion (US$14.3 billion) and forecasted 2013 investment volume is C$26-27 billion; capitalization rates have begun to stabilize at historic lows and financing rates continue to be competitive.
Given these dynamic indicators, Canada has a robust domestic real estate investor community, with strong and proven public market investment trusts, pension funds and private equity investors leading the charge. That said, we are beginning to see a slow and steady increase in the number of global investors who are forming strategic ventures with Canadian real estate entities with a view to tapping into the Canadian commercial real estate market.
And with only 1.6% of real estate investments in the first half of this year being made by foreign investors (according to CBRE), Canadian investors remain largely unchallenged by non-Canadian players.
The following, therefore, is something of a primer for the non-Canadian investor who is looking at Canadian real estate and needs to understand the legal framework of Canada’s real estate market.
Title systems and transfer fees
The majority of the provinces in Canada have adopted (or are in the process of converting to) the Torrens system (generally referred to as land titles) for holding real property, whereby a register of land holdings is maintained by each province with a guarantee of indefeasible title to those identified as owner on the applicable register.
In other words, the Canadian legal framework for real estate ownership is consistent with what foreign investors would expect in the US. Canada offers similar certainty as to legal ownership as evidenced by registered title.
Foreign investors will have to factor into the cost of each transaction the applicable registration fees/taxes that are levied on the transfer of an interest in land.
Concurrently with the registration of a transfer/deed of sale the majority of provinces in Canada will levy a property or land transfer tax in the range of 0.5% to 3% of the total purchase price attributable to the real property. The assessment rate typically “steps-up” through three to five threshold amounts with the maximum rate assessed at and above the highest threshold amount, which varies across provinces.
Those provinces which do not levy a property or land transfer tax will charge a registration fee typically set as an amount per thousand dollars of total purchase price attributable to the real property.
Partnerships and funds
More often than not, foreign investors enter the Canadian commercial real estate market by partnering in some fashion with an existing Canadian real estate venture, so as to take advantage of its domestic reputation and expertise. In some instances that is done in a conventional joint venture/co-ownership structure, but where the foreign investor is looking for diversity and local asset management, often the choice is to invest in a Canadian real estate private equity fund or investment management fund. The advantage to this approach is that it provides the foreign investor with direct investments in real estate, with the benefit of the established investment and divestiture principals of the fund, and with diversification in class and geography.
Investing in such funds also aligns the foreign investor with sophisticated domestic institutional investors, introducing the foreign investor not only to the market, but to the Canadian real estate community. And in a competitive and vibrant investment environment, real estate bids are won not only on price, but on reputation, giving the advantage to the respected and known bidder (and its partners/investors in the bid, domestic and foreign).
That said, there is no substitute for being well informed and well advised when entering any new market. Investors considering entering the Canadian commercial real estate market will best equip themselves for success by seeking the counsel and direction of both an experienced real estate adviser and an experienced legal adviser.
Simon Crawford is a partner at Bennett Jones LLP, a law firm with offices in Calgary, Toronto, Edmonton, Ottawa, Dubai and Doha, and representative offices in Washington DC and Beijing.
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