The potential merger of the TMX Group, operator of the Toronto Stock Exchange, and the London Stock Exchange Group has sparked hot debate throughout the Canadian business community. The move would create the world's biggest stock exchange, with more than 6,000 companies traded. The resulting company would be worth $6-billion and be jointly based in London and Toronto.
As Ottawa decides the deal’s fate (any merger or takeover of a Canadian company worth more than $299-million can be subject to government approval under the Investment Canada Act), experts in commercial real estate are weighing in. And while some see a favourable outcome, others are warning of negative side effects.
The merger should give both Canadian and British investors greater access to each others’ markets, particularly in real estate investment trusts, says Milton Lamb, senior vice-president of national investment for Colliers International in Toronto.
“There is only so much product available in Canada,” Mr. Lamb says. “The biggest complaint I receive from investors is the lack of supply in both new, quality construction and in just acquiring high quality real estate. Because the good news is we have very strong ownership in the REITs and the pension funds. But the bad news is that because it's very strong ownership, and if it’s good product, a lot of them don't sell, so it's very difficult for people to get in.”
Meanwhile, because Canadian REITs trade at a higher yield than those in the U.K., they may attract British investors, Mr. Lamb says. “In the U.K. for mature REITs they are trading in the 3- to 5-per-cent range, while we are in the 5- to 6.5-per-cent range.”
Julian Brandon, vice-president for office leasing and corporate services at DTZ Barnicke, doesn't see the merger as having a major effect on commercial real estate in Canada.
“Investors have been actively pursuing Canadian real estate across all classes for years, and since most investment money comes from established Canadian pension funds, I don't see this as a game changer,” Mr. Brandon said.
Others, however, see burgeoning investment from overseas.
“I've been studying this market for 20 years and I've never seen so much international money coming into Canada to park,” says Don Campbell, president of the Real Estate Investment Network and author of Real Estate Investing in Canada. “Canada has become a safe haven for capital, for Asia and Europe and the Middle East, and right now, in order to get into the market, they have to buy one of our assets or a portion of one of our assets.
“It's very difficult if you're outside of Canada to buy into a Canadian REIT. Because a lot of Asian and Middle Eastern money goes through the London Stock Exchange, the merger will open up access to our companies and our major corporations, but more importantly our REITs.”
Furthermore, as much of the world remains in turmoil, foreign investors are looking to Canada like never before, Mr. Campbell says. “This is Canada's decade. We have what they want: food, fertilizer, fuel and forestry. Right now China's looking around the world and saying, ‘Where are we going to get our fuel and our forestry from?’
“We are that safe, secure, boring supplier – and I don't mind that at all because that creates jobs, and jobs drive real estate markets.”
A flood of foreign capital would be good for asset holders and bad for buyers, Mr. Campbell warns. “It will overinflate the asset value of commercial and major residential property. The [capitalization] rates will definitely come down, which will make it more difficult to get financing.”
Mr. Lamb says that as more international investors try to get into Canada, the yields on some Canadian REITS may fall. “It's just supply and demand. There's only so many trust units out there, so the more people willing to pay, the price goes up. And if the price goes up, the yield goes down.”
But how will this affect our downtowns? Will we see a flurry of development as foreign money pours in?
Mr. Lamb foresees no change. “Canadian investors are conservative by nature. We don't go into development frenzy. Opening up to the U.K. may help a bit with access to equity, but no one is going to develop unless we know we can fill those towers or fill the industrial with tenants.”
The majority of money will go into buying landmark buildings, Mr. Campbell says. “New development is only going to occur if the job creation occurs. Where the new development is going to occur is in Calgary, probably in Edmonton. You will probably start to see it occur in Toronto but the land itself – where are you going to build it?”
But the TSX-LSE merger is far from a done deal. If the merger doesn't go through, Mr. Lamb doesn't think it will have any negative effect. “Without the merger, the Canadian REIT market will remain strong, as Canadians are still seeking secure income investments.”
Mr. Campbell says it wouldn't necessarily be a bad thing if the merger didn't go through, because that would allow the market to grow more organically.
“Right now, the amount of foreign money coming in is substantial, and that is a good place for us to be,” he says. “And it's going to continue for many, many years in Canada.”