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Blackstone to sell $900-million Canadian portfolio

The world’s largest private equity firm is taking its money out of Canadian real estate to take advantage of surging demand for buildings, flooding the market with $900-million of office buildings.

Blackstone Group LP has conscripted CIBC World Markets to sell its 29 Canadian buildings just as life returns to the Canadian investment market, with cash-rich real estate investment funds looking to invest billions of dollars to expand their portfolios.

Read the story in the Globe and Mail

Several large blocks of property have come to market across the country this quarter, as owners look to sell into what some consider an unprecedented level of demand.

“If you’re going to sell I can’t even imagine there being a better time than now,” said John O’Bryan, vice-chairman of commercial brokerage firm CB Richard Ellis. “All types of buyers are well represented. And while there are a lot of reasons to think property values could go down, it’s hard to imagine many reasons why they should continue to go up.”

Buyers are flush with capital, he said, and are willing to spend to add to their portfolios. Primaris Retail REIT (PMZ.UN-T20.68-0.24-1.15%) said yesterday it would spend $572-million to buy five regional shopping centres from Ivanhoe Cambridge, in a bid to boost its retail presence in the Greater Toronto Area ahead of an expected surge of interest from U.S. retailers looking to expand north.

The marketing material for the deal said Target Corp., which is expanding into Canada after buying about 200 Zellers stores, “has given indication that four Zellers stores in the portfolio may be converted to Target stores.”

Canada Lands Corp., meanwhile, said it is seeing “intense” interest for the Metro Toronto Convention Centre (along with its office tower and hotel) – a jewel in its portfolio that it vowed not to sell until it could attract enough bidders to drive up the price.

It’s not just REITs that are looking to buy – private equity firms and pension funds are also likely to take a look at Blackstone’s 29 mid-tier buildings in Toronto, Ottawa, Calgary and Edmonton.

Mr. O’Bryan said buyers are especially interested in any opportunity to buy a cluster of properties at once, something that is very difficult to do in Canada.

The largest deal in the last year was an example of this – ING Groep NV sold its Canadian industrial real estate portfolio to KingSett Capital and Alberta Investment Management Corp. in a $2-billion deal that gave the new owners an instant national profile in the industrial space.

The price tag on the Blackstone deal makes the portfolio the largest cluster of office buildings to be marketed to investors since 2005, when Oxford Properties sold a 50-per-cent stake in its holdings to Canada Pension Plan Investment Board.

The market has been less active since then – in 2010 about $700-million in office buildings were snapped up by the country’s REITs. In 2007, investors had their busiest year as they bought $1-billion worth of office properties.

“There will be strong interest from buyers at all levels for a deal like this,” said George Carras, president of real estate tracking firm RealNet Inc. “These properties represent income and stability – they are in major markets and well leased. That’s what investors want – shelter and income.”

New York-based Blackstone, which has $26.5-billion (U.S.) in real estate around the world, would not comment. Industry sources said the private equity firm was likely motivated to sell by the high Canadian dollar. When it bought the buildings, the Canadian dollar was trading close to 80 U.S. cents.

The buildings, which are managed by Toronto’s Slate Properties, are mostly class-B space and are 96-per-cent occupied. They include a former Royal Bank of Canada headquarters in downtown Toronto that was built in 1914, the National Building in Ottawa, the 100-year-old Kipling Square in Calgary and the recently renovated Baker Centre in Edmonton.

While it may seem like a good time to sell, there are risks.

“The danger of flooding the market like this is they are potentially depressing their own sale prices,” said John Andrew, a real estate professor at Queen’s University. “I hope they don’t see this as some sort of market peak. What is more likely is they want to take that money and invest it in other markets where there are more opportunities to buy at distressed prices.”