April 9, 2010 / 1:48 AM / 8 years ago

North America property firms stymied by supply drought

TORONTO (Reuters) - A wave of distressed properties expected to flood the North American market over the past year has never materialized, investors say, even as their ability to finance real estate deals improved considerably.

As a result, Canada’s largest real estate firms have plenty of cash but few places to put it to work, executives gathered for an industry conference in Toronto said on Thursday.

At last year’s CIBC World Markets real estate conference, the industry was eagerly awaiting what was expected to be a fire sale of properties as the deep recession in the United States and elsewhere took its toll.

Instead, not very many bargain-priced properties have been put on the block, executives say. At the same time, investors and property companies have managed to build up their capital positions as the global credit crisis eased.

Edward Sonshine, CEO of RioCan, Canada’s largest and oldest REIT, said the company was sitting on more than C$100 million ($100 million) in cash waiting for the right acquisition to come along, ready to spend aggressively.

“I regret to say (so far) there is nothing to buy,” he told the conference.

“There is more money than deal flow,” said Richard Dansereau, managing director at Stonehenge Partners, a company that deals in residential buildings, mostly in Manhattan.

Canadian REITs such as Crombie and Allied Properties said their liquidity has never been stronger.

Jim Britton, chief executive of Northern Property REIT, said it is very difficult to buy right now. Until the “standoff” ends, the company is working on its operations in Canada’s Far North, which has benefited from a resurgence of interest in developing diamond and other mines there.

Pension funds may still emerge as a source to ease the lack of supply on the market as they weed out lower quality assets and use the proceeds to upgrade their portfolios, executives said.

“I think the supply product will come from people who want to diversify. We would be a good example of that,” said Andrea Stephen, executive vice president at Cadillac Fairview Corp, a unit of the Ontario Teachers’ Pension Plan.

Stephen said the fund is interested in the U.S. and British markets but has seen little in the distressed market.

But panelists argued that more opportunities to buy distressed properties may surface as interest rates in Canada and elsewhere start to rise. The Bank of Canada has signaled it may start raising rates, now near zero percent, in the second half of the year.

The resource-based Canadian economy is recovering quickly from recession, and its budget deficit has remained relatively small.

While the economy’s health has made Canada a magnet for investment, foreign-based investors have not moved aggressively into real estate yet. That may reflect the lack of supply.

“Foreigners love the Canadian story. What they don’t like is the pricing right now,” said Paul Zemia, chief investment officer at Bentall LP, the largest Canadian-based real estate advisory and services firm.

Other panelists also said the concentration of ownership is a concern for foreigners. Many of them may want bigger stakes than are available, while Canada’s tax structure is less efficient than in other parts of the world.

Still, there are some signs of interest. On Wednesday, Islamic lender Kuwait Finance House said it had set up a joint venture with Canada’s Killam Properties Inc to buy up to C$450 million of residential property in Canada. The joint venture is part of the Kuwaiti lender’s plans to expand in global markets, it said.

Panelists said new vigor may come to the Canadian IPO market as well, with as many as seven companies expected to come to market with offerings.

Additional reporting by Pav Jordan; Editing by Frank McGurty

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