Commercial real estate facing bubble scenario

Experts around the world once believed the residential real estate market was once heading for a bubble situation, but they now think the same will happen to the commercial market, reports The Globe and Mail.

For at least a year, the key players within this sector, which include Canadian pension funds, REITs and insurers, have indicated that the market, which has always been cyclical, appeared to be reaching its peak.

But the real question, for many, is whether or not they have done enough to prepare for a potential softening of the market.

“With most Canadian institutional real estate investment focused on domestic real estate, pension funds could be seriously overexposed in the event of a downdraft in the market,” says Richard Johnson, managing director of Zurich-based UBS Global Asset Management.

Commercial properties in Canada boast a 10-year annualized total return of 11.9 per cent, according to market data from Investment Property Databank Ltd. That figure is the highest of all countries covered by IPD, save for South Africa.

These stats are comparable against an approximately 8 per cent return on equities, and 5.6 per cent on bonds.

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