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The notion of a new wave of investment in commercial properties, such as downtown Toronto seen here, is troubling to some Canadian real estate players who are concerned that valuations are already lofty.Fred Lum/Toronto Public Library

Four Canadian cities are increasingly punching above their weight on the global stage, and are poised to attract more capital from foreign real estate investors, Jones Lang LaSalle says in a new report.

The brokerage firm is forecasting rising demand from global investors for commercial properties such as offices, shopping malls and factories in these cities.

"A marked shift in international interest in Canadian cities will occur over the next five years," its report predicts, singling out Toronto, Vancouver, Montreal and Calgary.

The notion of a new wave of investment in commercial properties is troubling to some Canadian real estate players who are concerned that valuations here are already lofty, and that an asset bubble could form if investors continue to bid up the price of properties.

The 10-year annualized total return from Canadian commercial real estate is 11.9 per cent, second only to South Africa, according to Investment Property Databank Ltd.

Those stellar returns have spurred investors to continue to pour money into the market, but so far most of that has come from Canadians.

As Jones Lang LaSalle points out, Canada has one of the lowest proportions of foreign capital invested in its real estate market in the world. The market is dominated by local pension funds, insurers and real estate investment trusts. Those Canadian players have had plenty of funds to invest, and have chosen to increase the proportion of their investment portfolios that is dedicated to real estate because of the strong returns. Their knowledge of the local markets has given them an edge over foreign players when it comes to winning key assets.

"This should not be interpreted as a lack of demand by foreign investors, many of whom remain keenly interested in the Canadian market, but merely a lack of success in transacting," JLL says. "Compared to other countries with similar property markets and transparency attributes, such as Australia, Canada stands out as being one that foreign groups find particularly difficult to penetrate. For example, while inbound investment in Australia has regularly exceeded 30 per cent of total investment, only 10 per cent on average of all transactions in Canada since 2007 have involved foreign groups, with 2012 marking a low point of only one per cent."

But Canadian real estate players have now begun turning their sights abroad, looking for new markets to grow in as Canadian properties have become more and more expensive. And many local players are worried that the market is near its peak.

JLL's positive outlook for the four Canadian cities is based on a number of factors, including growing infrastructure spending, new efforts to bolster tourism by the Canadian Tourism Commission and strong urban strategies.

"We anticipate that over the next decade the 'Quartet' cities will firmly secure their places on the world stage with all four cities regularly featuring among the world's top 30 real estate investment destinations," the report says.

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