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TORONTO.JAN.06.2009 FILE PHOTO A Jan. 6, 2009, file photo of Scotia Plaza in downtown Toronto.Fred Lum/The Globe and Mail

Real estate is expected to be a big driver of merger and acquisition activity for the second year in a row as investors seek cash flow and yield in a low interest-rate environment.

Last year, real estate was second only to energy in transaction values. The end of the year was particularly strong, with real estate acquisitions accounting for 22 per cent of all target activity in Canadian M&A in the fourth quarter, according to new research by PricewaterhouseCoopers. Those results also drove pension returns.

Continued growth in the sector is the number one trend that PwC is predicting will drive the Canadian M&A market through 2013 and beyond.

"When we talk about tier-one commercial real estate, like shopping centres and REITs, tenants have long-term leases and can provide a good yield ," said Nicolas Marcoux, PwC's Canadian deals leader, said in an interview. Commercial real estate offers investors a predictability of cash flow that's appealing, he said.

PwC notes that because no one is sure when interest rate hikes in Canada and the U.S. will happen, there will continue to be opportunities in commercial real estate. Europe may offer speculative buys, but North American investments offer a stable yield.

It will take discipline to find the right investments: "buyers will be more diligent with their investment dollars as they believe the low hanging fruit has already been picked," PwC wrote in the 2012 capital markets research note.

Real estate is also one of the areas that bolstered Canadian pension plans through the end of 2012, according to Royal Bank of Canada data out this morning.

Along with global equity strength, real estate returns helped offset instability in other sectors such as commodities. Canadian defined benefit (DB) pensions grew by 2.5 per cent in the final quarter of 2012, down from 3.2 per cent the quarter before. In total, the DB plans in RBC'S $410-billion RBC Investor & Treasury Services All Plan universe hit a median of 9.4 per cent over the course of last year.

Real estate assets brought in double-digit returns for pensions last year.

The strength in equity performance through the quarter was demonstrated by eight of the 10 sectors in the S&P/TSX Composite. RBC notes that consumer staples, IT and financials were the strongest gainers over the fourth quarter.

Mr. Marcoux of PwC also agrees that, outside of real estate, consumer packaged goods will stay strong through 2013, with more M&A in that sector. The other two sectors he will be watching closely for deals are technology, and aerospace and defence.

(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)