Good time to invest in office space in Canada

CHICAGO -- Bank of Nova Scotia may have found the perfect time to sell Scotia Plaza, a Toronto office complex that's expected to fetch as much as $1.5 billion, a record for Canada.

Office vacancies are falling in Toronto and the rest of Canada amid economic growth led by the oil and natural-gas industries. Investor interest in commercial property is rising after the total return on real estate climbed almost 16 per cent last year, the most since 2006 and outpacing gains in the U.S., according to the REALpac/IPD Canada Annual Property Index.

Low vacancies and increasing demand are pushing developers to build 8.9 million square feet of office space in Canada, the most since the first quarter of 2010, according to CBRE Group Inc.

Office property values probably will rise 20 per cent this year in Calgary and about 10 per cent in Toronto and Vancouver as low vacancies help landlords raise rents, according to estimates by CoStar Group's Boston-based Property and Portfolio Research Inc. Montreal values are expected to gain four per cent.

The increase in rents and occupancies has helped Canadian real estate investment trusts. The 23-member S&P/TSX Capped REIT Index had a total return of 13 per cent in the 12 months through March 29. Canadian REITs are likely to have strong returns in 2012 as well, said Heather Kirk, an analyst at National Bank Financial.

"The key Canadian office markets are doing very well," she said.

Canadian REITs are estimated to have a total return of 15 per cent to 25 per cent this year, partly because of low and falling vacancies, limited new construction and demand from investors for income-producing securities, according to a Feb. 29 report by CIBC World Markets Inc. analysts led by Alex Avery. The REITs gained 22 per cent last year, including reinvestment of dividends.

The top-performing REITs this year have been Winnipeg's Artis Real Estate Investment Trust, an owner of office, industrial and retail properties, and Boardwalk REIT, which focuses on apartments. Both companies' shares have gained 14 per cent since the beginning of 2012.

Scotia Plaza, which has two million square feet, mainly in its 68-story main tower, is worth $1.3 billion to $1.5 billion, said Robin White, a broker and executive vice-president at real estate services firm Avison Young Inc. in Toronto.

-- Bloomberg News