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big deals

RBC Dominion managing director William Wong: ‘Retail investors have driven a lot of the demand for yield.’Fernando Morales/The Globe and Mail

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The frenzied pace of activity that kept the real estate sector humming during 2012 is set to increase this year.

The flood of equity issues continues, a takeover of one of the sector's dominant players – Primaris Retail Real Estate Investment Trust – is nearing completion, and numerous IPOs are in the works, including the pending creation of a REIT by Loblaw Cos. Ltd. that will immediately become one of the biggest in the country.

Underlying it all is the insatiable appetite that investors have for yield, as low interest rates have eviscerated the buffet of bonds and other securities that once offered solid returns.

"When you step back and say what's going on here, I don't think you can say real estate is a really undervalued asset class right now, because it's not," says Andrew Phillips, managing director and team head of the real estate group at TD Securities. "What's driving it is there's this demand for yield."

The S&P/TSX REIT index posted a total return of about 17 per cent in 2012, compared with about seven per cent for the broad S&P/TSX composite index. With investors chasing those returns, the value of real estate equity issued (more than $7-billion) set a record during 2012, and it accounted for a larger proportion of total equity issues than in years past, Mr. Phillips added.

"When people think of the TSX, they think of natural resources or financial institutions, so that's huge," he said, adding that there's a desire by the market to see real estate issuers grow bigger.

That's a challenge that could become more difficult going forward, as competition among the players has bid up the price of real estate assets from downtown skyscrapers to shopping plazas. Some REITs have signalled that the amount of properties they've been buying might have peaked for the time being.

RioCan Real Estate Investment Trust, the country's largest REIT, bought more than $1-billion worth of real estate in 2012. But the shopping centre owner disclosed in February that for the time being it was in talks to buy just $68-million worth of properties in both Canada and the United States, while it was seeking to sell about $600-million worth of properties in Canada alone.

At these real estate prices, the big players are increasingly sellers. "I just don't see us getting anywhere near the kind of acquisitions we did last year," Dundee REIT chief executive officer Michael Cooper said on a recent conference call, pegging his current acquisition pipeline at about $400-million. He doubled that level in one deal alone during 2012, the blockbuster $1.3-billion acquisition of the 68-storey Scotia Plaza in Toronto's financial district by Dundee REIT and H&R REIT.

While growth might not come through large asset purchases this year, Mr. Cooper said that "2013 looks like it could offer further opportunities for our company and that our core market valuation has room to grow, so we are quite optimistic about the current year." As proof of such, the REIT just increased its distribution for the first time since it was created in 2003.

Mr. Cooper fed the market with the spinoff of Dundee Industrial REIT in September. It was one of seven Canadian real estate IPOs that were completed during the year, with yield's ranging from six to 8.5 per cent.

"Retail investors have driven a lot of the demand for yield," says William Wong, a managing director at RBC Dominion Securities. Of the roughly $7.5-billion worth of equity and convertible debenture transactions that took place during 2012, 32 per cent went to institutional investors while 68 per cent went to retail investors, according to data from RBC. And since a significant amount of institutional investors are managing mutual funds, the true retail percentage is likely even higher.

Mr. Wong has been with RBC since the inception of the REIT market in the 1990s, and he says 2012 was one of his busiest years. "But I think this year is on pace right now to be potentially even busier than last year," he adds.

"There are a lot of IPO mandates, there are a lot of inbound calls for meetings, and there's a lot of interest from foreign investors trying to bring product to the Canadian market," he says.

That's one of the major themes going into 2013, with a large number of companies that have a portfolio of U.S.-based real estate seeking a listing on the TSX.

There are a number of factors that drive companies to Toronto to seek a listing. "To do an IPO in the U.S. you have to be much larger scale, it takes a lot longer, and you can't have an externalized management arrangement as you can in Canada," says Mr. Phillips.

But it's not just Americans that are looking to create TSX-listed REITs.

"One thing that we're seeing really as a result of Loblaw's announcement of its intention to create a REIT with its large real estate portfolio is that there will likely be opportunities for investment grade owners and occupiers of real estate to surface the previously unrecognized value of their real estate," Mr. Wong says.