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Several of the office towers being bought by Dundee REIT are along Toronto's Bay Street, in the city's financial district.


Dundee Real Estate Investment Trust has scooped up a trove of downtown office buildings in one of the biggest real estate deals in Canada since the recession, allowing it to lay claim to a portfolio that rarely hits the market.

The company said it will purchase 29 buildings from Blackstone Real Estate Advisors LP and Slate Properties Inc. for a total of $832-million, many of which are located in the heart of Toronto's financial district. Blackstone had acquired the buildings bit by bit over the years, and, in May, the private equity firm announced that it was looking to unload them, along with the rest of its Canadian portfolio.

The deal highlights the way Canada's commercial property market has bounced back from the economic downturn, and the ease with which real-estate trusts have been able to raise money for acquisitions. Since Ottawa largely eliminated income trusts outside the real estate sector, retail investors have been plowing money into REITs in search of higher-yielding investments.

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To secure the buildings, Dundee had to fend off rivals in a formal bidding process. However, the company could afford to pay extra because the properties fit with its focus on office space and it already manages nearby buildings, meaning it thinks it can find cost savings.

"The linchpin of the whole portfolio is the position in downtown Toronto," said Bruce Traversy, a senior vice-president at Dundee who is responsible for property acquisitions.

In total, Dundee has now purchased almost $1.6-billion worth of properties in 2011, and it is not alone in pursuing deals. Its rivals have also nabbed almost everything that comes to market.

Dundee's buying spree comes on the back of an active 2010, during which it purchased almost $900-million worth of buildings. Mr. Traversy said that the company didn't expect to keep up that pace this year, but more buildings are coming available because the owners know this solid property market may not last. Blackstone itself highlighted the current strength of Canada's market when it announced that it was looking to unload its properties.

"The market continues to be very favourable for Canadian REITs," said Dennis Mitchell, deputy chief investment officer at Sentry Investments. "The low-interest-rate environment makes acquisitions very accretive. Combined with high occupancies, low pending new supply and gradually rising demand, Canadian REITs are in a sweet spot to deliver strong total returns."

On the latest deal, Dundee will borrow at a rate of 4.4 per cent, and it expects an average return of 7 per cent on the portfolio.

But analyst Alex Avery at CIBC World Markets said that some of the activity in the sector "is simply catch-up from the credit crisis period, when virtually no transactions occurred, disrupting the normal trading activity of the property markets."

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Dundee's new office towers in downtown Toronto are Class A-minus and Class B buildings, which means the rents are slightly cheaper than the top-notch towers, and the tenants are usually somewhat smaller companies. Downtown office rents are climbing, so there are likely some tenants who want to be in the downtown core but cannot afford to rent space in a Class A building.

Despite all of its buying, Dundee has also publicly acknowledged that it will look to divest some of its legacy portfolio that doesn't mesh with its downtown office strategy.

"We've certainly grown a lot, we've acquired a lot of assets," Mr. Traversy said. "So we're going to have a closer look to see if there are assets that maybe some entities value more highly."

Of the 29 buildings changing hands, Dundee will keep 24 of them. The remaining five will be passed along to third parties because they don't meet Dundee's needs, bringing the REIT's purchase price down to $690-million.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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