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Industrial real estate investments lagged behind the office sector last year in both Canada and Australia, according to new reports from IPD (Investment Property Databank), an international company that provides performance analysis for real estate owners, investors, managers and occupiers. Nonetheless, both sectors continued to show positive returns.

In Canada, IPD says industrial properties showed returns of 2.3% compared to 7.6% for offices and 6.4% for residential. Retail, on the other hand, trailed all categories with a loss of 0.1%. In Australia, industrial returns stood at 2% compared to 2.7% for offices and 0.7% for retail. Residential properties were not included in the Australian study.

The overall Canadian market saw a return of 3.7% for 2008, down sharply from the 15.8% recorded in ’07, and the lowest level recorded since 1994. But IPD points out the general investment real estate sector still outperformed equities and REITs, which saw returns of -31.4% and -39.3%, respectively. On the other hand, real estate trailed bonds ,which returned 15.2%, as measured by the JP Morgan 7-10 Year Government Bond Index.

“Declines in property values account for the weaker returns recorded in 2008, with on average capital value write downs of 2.3%,” says IPD senior manager Doug Rowlands.

Geographically, markets in Western Canada continued to outperform those in Eastern Canada. with Edmonton once again took top spot among the major markets, though its return of 11.7% was down significantly from 29.8% in 2007. The other major markets all moved down into single-digit return territory or lower, with Calgary at 7.3%, Vancouver at 7%, Ottawa at 5.4%, Toronto at 2.7% and Montreal at 0.3%.

IPD says Australia saw a total return of 1.8%, after Q4 suffered the largest individual quarterly decline in value since 1993. IPD director John Garimort says sellers and buyers are having difficulty determining correct pricing due to lower levels of investor demand brought about by the lack of capital, a significant increase in the amount of supply of assets available for purchase and lowered expectations regarding the tenant strength. Noting that capitalization rates have been on the rise since the credit crisis hit late in ’07, he says they rose again in the final quarter, with the average office and retail caps going up 50 basis points over 12 months. “The industrial sector increase has been more moderate,” he adds.

In contrast to Canada, IPD says the he yield of Australian properties, as represented by the cap rates in use by valuers, currently offer a spread of more than 250 basis points over 10-year government bonds.”The yield spread needs to account for the increased covenant risk of tenants,” Garimort observes.”These tenants are operating in an economy where their businesses are facing an inordinate number of challenges. At some point, the premium on offer will shakeloose capital investment.”

The Canadian study was conducted in conjunction with the Toronto-based Institute of Canadian Real Estate Investment Managers, while the Australian study was conducted with the Sydney-based Property Council of Australia.

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