COMMERCIAL INVESTMENT

 

 

 

 

 

 

 

 

  <<  DOUBLE CLICK ARTICLE

Just as former French president Nicolas Sarkozy vacationed in Quebec, Vancouver and Toronto is similarly spot for wealthy Asians to stay clear of high-society for a stress-free break; plus the air is so fresh in Canada.   Its their cottage country!

We are heading into 'high rotation' now with visiting season beginning now that school has finished for most.   So we're storing some basic facts on Canadian Real Estate for our high-end visitors from Asia.  

Top Office Deals in Canada

1.  Scotia Plaza Toronto (2012), $1.27-billion
      -- Sold by Bank of Nova Scotia to Dundee & H&R 

2.  Commerce Court, Toronto (2000), $618-million
       --   Sold by CIBC to British Columbia Investment Management Corp.

3.  Royal Bank Plaza, Toronto (1999), $485-million
       --  Sold by Royal Bank to Oxford Properties and OMERS Realty Corp.

4.   Bankers Hall Complex, Calgary (2000), $437-million
       --  Sold by TrizecHahn Corporation and Calgary Financial Tower Ltd. to Gentra Canada Investments

5.   Brookfield Place - TD Canada Trust Tower, Toronto (2008), $429-million (half-stake)
       --  Sold by Brookfield Properties to OMERS Realty

6.   Gulf Canada Square, Calgary (2007), $382-million
       --  Sold by O&Y, Brookfield, CGS to Great West Life and London Life

7.   Bentall Kennedy bought the fully leased, 33-storey Bentall V tower in Vancouver (2012), for almost $400-million

Canada's real estate is dominated by Institutions

Canada a hot destination for US retailers
Canada a hot destination for US retailers

Whole Foods at Hazelton Lanes in Toronto gross $1,000 per sq ft

More US retailers looking for fresh markets are turning to 
Canada, lured by their northern neighbour's resilient economy, strong 
currency and the familiarity with their brands.

Express Inc, a speciality clothing retailer with about 600 US stores, last 
week opened a Canadian store in Toronto and said it would have six by the 
end of the year. Nordstrom Inc and Kohl's Corp are looking into opening 
department stores in Canada, though neither has announced plans. Target 
Corp, the No 2 US discount retail chain behind Wal-Mart Stores Inc, expects 
to start opening Canadian stores in 2013.

Many chains see Canada as untapped territory, having nearly run out of 
promising locations in the United States to open new stores, said retail 
consultant Wendy Evans. 'Many of them have reached or are about to reach 
saturation in the US,' said Ms Evans, whose firm, Evans and Co, advises 
companies on cross-border expansion.

US chains are also looking for ways to counter a poor outlook for retail 
sales at home because of unemployment and a weak economy.

Home improvement chain Lowe's Cos Inc, which last month reported 
worse-than-expected quarterly sales, has sought a boost in Canada where it 
has 28 locations. It has 1,700 stores in the US.

'Canada is going well,' Lowe's chief executive Robert Niblock told Reuters 
last month. 'We have got many more stores in the pipeline.'

The US has nine times as many people as Canada's population of 34 million. 
But compared with a US economy in danger of tipping into a double-dip 
recession, Canada is holding up much better, even though it is vulnerable to 
any US slowdown. It also has regained all the jobs lost in the 2008-09 
recession.

Its currency has traded at nearly the same value as the US dollar for years, 
flattering the top lines of retailers that report their results in 
greenbacks.

Zale Corp, which owns Peoples Jewellers, Canada's largest jewellery chain, 
said the Canadian dollar added one percentage point to its sales gains in 
established stores last fiscal year.

Zale gets 17 per cent of its sales north of the border, where its stores 
generated on average US$1.4 million last year, compared with US$1.2 million 
stateside at its Zales chain.

Upscale jewellery store chain Tiffany & Co this year opened a store in 
Calgary to tap that oil boomtown's growing wealth.

To be sure, Canada's economic picture is far from perfect. Unemployment rose 
to 7.3 per cent in August, and Canadian retail sales slipped 0.6 per cent in 
July, a steeper-than-expected drop. Cultural differences might be a 
constraint. Consumer spending accounts for 58 per cent of Canada's gross 
domestic product, compared with 70 per cent in the US. Even so, that might 
suggest more room for growth if Canadians adopt the free-spending ways of 
their American neighbours.

For retailers, one of the attractions is that they often can charge higher 
prices than in the US for the same products, much to the chagrin of 
consumers.

J Crew Group Inc, which last month opened its first Canadian store, annoyed 
Canadian shoppers with its higher prices. The company told Toronto's Globe 
and Mail newspaper that prices would remain about 15 per cent higher because 
of the costs of doing business in Canada.

Canadian shoppers prize value, making the country 'fertile ground' for 
lower-price chains, said John O'Bryan, vice chairman of commercial real 
estate firm CBRE Canada.

That's one reason that the trend of expanding in Canada is most evident 
among discount retailers.

Target Corp plans to open up to 150 outlets. Wal-Mart has some 329 stores in 
Canada, with more to come.

TJX Cos Inc, earlier this year opened its first Canadian location for its 
Marshalls discount department store chain, and believes the market could 
sustain 100 stores.
--  2011 September 29    Reuters

This recent headline caught our attention:

  • Cover story  -  Immigrant Investors applications from the various Canadian Commissions in The Far East.   Fascinating!      - 2011 Sept 21   

So no wonder the property markets in certain Canadian cities have appreciated in value.   This isn't going to let up so demand exceeds supply.    Although certain sectors are worrisome because of so much new stock coming onstream in coming years.


  -- 2011 June 3  GLOBE & MAIL

BACKGROUND:

   -- 2011 June  GLOBE & MAIL

Chinese love affair with Canada continues

The market in Vancouver for Chinese buyers is extremely hot as pointed out in a January article in the South China Morning Post.  

It's a top destination for wealthy mainlanders looking to emigrate from China and, when they land, many immediately look to purchase a principle residence."

"Wealthy Chinese tend to be more comfortable with real estate as an investment. "Because of the language barrier, many of clients are less comfortable with putting their investment dollars into financial products or services they do not understand, or know what the risks are. With real estate, they get to see something tangible."

"They are willing to put a greater weighting of their portfolio into real estate. In the wealthier areas, Chinese buyers are consistently out-competing locals for properties. Our research indicates that on the wealthier West Side of Vancouver, 78 per cent of homes of more than C$2 million were sold to Chinese buyers in 2010."      "Canada is in the strongest fiscal position of any country in the G8 and has an over-abundance of natural resources to feed its economy in the 21st century," he says. "Vancouver may be the best-positioned city in the world."   - 2011

Institutional Investors invest abroad

Bicultural linkages

Our good friend Beijing-based Joanna Wong won Asia Pacific Foundation contest with this video and is APF's media fellow for 2011.      She is the niece of philanthropist Milton Wong

This is classic! I wish every Canadian would read this message:

Canadians are missing the boat. We haven’t moved fast enough and used the things we are really good at, like clean technology, water purification and green building.

In China, they do five-year plans and the next one has about 12 new cities of over a million people being planned. And China is taking sustainable development seriously. I know they are the worst polluters in the world but they are also doing the most to remove pollution. When they decide to build these cities and that they will have green technology, that will be done. So why aren’t we there?

Institutional Investors

China, an interested investor with human linkages to Canada has outreached in ways not seen before.   

"...China wishes to join Canada in a concerted effort to treat and develop our relations from a strategic and long-term perspective, strenthen our friendly exchanges, expand win-win cooperation and further advance our strategic partnership from a new starting point"  -   2010 June 25  CHINESE PRESIDENT HU JINTAO -    GLOBE & MAIL

ICBC of China aquired Bank of East Asia network of 6 retail locations across Canada

Canada has turned the corner in its relationship to China but the system is still uncertain as to how to leverage the linkages in their country to capitalise on its potential as "Geneva of the Asia Pacific".   The ICBC deal was cooked in Hong Kong and local services were able to facilitate the deal making.     Funny....so obvious to many including this blog but happy to see the system respond appropriately.    

Canada generally speaking is in 'react' mode because they are running out of strengths that once made them unique and the system does not allow for long time changes that make the country strong and competitive.   e.g.   Northern Telecom which had some of the world's best Brain Power we allow it to dissipate to global competitors but Canadians will be taxed to pay for how many auto plant workers?    This is not quite what I visualized decades ago as young student taught to follow the system.

 

New 2011 accounting standards for public companies

The changes are significant.  

Example: 

Many property lease payments are just expensed, now all leases must be set up on the Balance sheet at its net present value as a liability.  This is to reduce “off balance sheet “ financing seen as misleading the readers.

On the lessor side, instead of recording all receipts as rental income, income is recognized as rental income and interest income as there is an interest component on the monthly payments.

These changes are expected to effect the length of any new lease.     >>   MORE     - Synopsis by STEVEN CHONG Toronto

We need strong foundations now to build the next generation of leaders in Canada.   Let's stop fixing what doesn't work and look ahead because the world is moving faster and more interconnected than Canada.  One only has to look at the markets daily.     Canada relative to the world is a vantage that is not covered well in local press.    The internet has helped us bridge that gap.  We do not view real estate as local investor but as a strategic player because the world is changing daily and real estate competes with other asset classes. 

 "It will be incumbent upon Canada to come up with ideas and initiatives to strengthen bilateral ties.   Canada does not register as a very important consideration in the scheme of all the global relationships and all the global issues that China is dealing with."  - President of the Asia Pacific Foundation of Canada   GLOBE & MAIL

Why Canada?

Canada is the world's most expensive country in which to own office towers

Taxes on commercial property rents are a 'massive' 53% of total income  >>  MORE

HOUSING


RELATIONSHIP WITH CHINA

Canada’s government has moved to improve relations with China.

For a year after it took office in February 2006, commercial relations were strained by Ottawa’s stance on human rights. The prime minister Stephen Harper promised not to be swayed by “the almighty dollar” of trade and investment. More recently the government has put a greater emphasis on the commercial side, culminating in Mr Harper’s first visit to China in December.

Canadian lukewarm on Chinese Investment

China will be one of the most vital countries for our economy moving forward, but that does not mean Canadians will like it, a new survey on Monday from the Asia Pacific Foundation found.

The online survey, conducted in March by Angus Reid on behalf of the Vancouver-based foundation, found that China was ranked as the second-most important country for Canada's prosperity behind the United States and just ahead of the European Union.

However, only 18% of Canadians said they would support a Chinese state-controlled fund or business buying a controlling stake in a major Canadian company.

The only country to score worse was the United Arab Emirates, at 16%. Singapore fared little better, at 20%.

Instead, most preferred such investments come from Great Britain (52%) or the United States (41%).

"While we recognize the apprehension Canadians feel about Chinese investments, if we want a share of that investment moving forward we have to come to terms with Chinese state-owned companies," Yuen Pau Woo, chief executive with the Asia Pacific Foundation, said from Vancouver.

The news comes the same day Chinese state-owned Sinopec paid US$4.65-billion for a minority stake in oil sands company Syncrude Canada.

"If this deal goes through it will be the strongest signal yet of acceptance [of China]," he said.

Chinese investments in Canada, particularly in the oil sands, have made some Canadians nervous about the communist country's growing influence within Canadian borders.

PetroChina, one of the largest oil companies in the world, ruffled some feathers when it invested almost $2-billion to purchase a majority stake in two properties owned by Athabasca Oil Sands Corp. last September.

While the deal was expected to close by October, it took until the end of December for Industry Minister Tony Clement to approve the deal.

"To successfully compete in a globalized economy, we need to attract international investment," Mr. Clement said at the time. "Our future prosperity relies on open markets and two-way trade."

Canadians evidently agree, with more than half (59%) saying Canada would benefit from more Asian investment.

It is amount of control that investment grants China that worries Canadians, Mr. Woo said.

"Canadians understand the need to engage, but they are unsure how to adapt to investment from China," he said. "Canadians may well be more receptive to a minority stake."

However, many Chinese companies would rather take minority stakes because there is more opportunity to learn without having to take responsibility for the company's operations, he said.

And with the United States putting immense pressure on China to allow its currency, the renminbi, to appreciate in recent months, it will only encourage more overseas investments.

"[The United States] may have to deal with an avalanche of interest [as well]," Mr. Woo said.

Concerns over the quality of products coming over from China is a factor, with only 17% of Canadians comfortable with the quality and safety of imported Chinese food and goods.

As well, only 51% said the overall impact of Asian immigration to Canada was positive, down from 57% in 2008.

Mr. Woo said the results do not reflect attitudes on immigration in general, but were lower than he expected.    - 2010 April 12   FINANCIAL POST

The next wave : innovative private Chinese companies

In the15-year period ended in 2007, Canadians invested $514-billion in business internationally. But only $1.8-billion - or about 3/10ths of 1 per cent - was invested in China, the world's fastest-growing economy.

Many Canadian companies - in mining, manufacturing, finance, insurance and other service sectors - understand the opportunities in China; they have developed their presence in the country, both in sourcing products and, to a lesser degree, expanding their operations into the domestic market.

But this is just the start, and a modest one at that. Canada's businesses, and its leaders, must wake up to the broader implications of China's potential and its rapidly developing business environment - or risk being left in the dust.

Foreign companies entered China initially to source products to sell in their own home markets (currently, about 60 per cent of the exports from China to the United States are controlled by U.S. companies). Increasingly, however, foreign companies are focusing on the vast Chinese domestic market itself and doing so quite profitably.

It's estimated that more than 800 Canadian companies are currently operating in China, but their activities are relatively low key - especially when compared with the march of Chinese state companies into Canada (PetroChina's $1.9-billion investment in the Alberta oil patch, for example, or China Investment Corp.'s stakes in Teck Resources, Kinross Gold and Potash Corp.).

And big changes are on the way in another level of Chinese commerce.

In the early 1990s, China had few "non-public" companies - only about 200,000 in a population of more than 1.3 billion. Today, millions of private businesses, by some estimates about 40 million, are operating in a ferociously competitive domestic market - and they are gearing up to move beyond China's borders.

Chinese private companies compete not only against each other but also, in some sectors, against multinational companies. The best of them develop strategies and operations that allow them to win in a market that is extremely demanding. They are aggressive, efficient, ruthless in competing on cost, and have a deep understanding of the domestic market and their customers.

Long-held views about Chinese private companies being unable to innovate or be effective in marketing are off the mark, and will be even more so over the next decade. Many of these companies are increasingly looking abroad to gain access to new markets, acquire additional capabilities and expand into new products and services.

A recent survey by China Market Research Group of several hundred Chinese business executives found that 50 per cent expect to enter the U.S. market in five years, after expanding domestically and in regional markets such as Africa and the Middle East.

Make no mistake: In the next five to 10 years, Chinese private companies will be competing in Canada on both cost and quality and will be able to innovate rapidly.

A current example is Haier Group, the fourth-largest white goods manufacturer in the world, with annual global sales of more than $18-billion (U.S.). Haier sells more domestic appliances than any company in 19 product categories in China, and has established manufacturing plants, and sales, distribution and design centres in all major international markets. Even in the global financial crisis, Haier accelerated its push overseas, which now accounts for one-third of its revenue.

In addition to potential Chinese competitors, Canadian businesses should be alert to the multinational companies that have learned to adapt, grow and compete in China. The Chinese market is unique, with huge potential volumes, low household incomes, widely diverse regional markets, rapidly evolving infrastructure and ever-increasing competition.

Consider General Electric. It came up with an innovative portable ultrasound machine, priced at only $15,000, that was originally developed for rural China, but was then adapted for the U.S. market. China's demanding marketplace will drive more multinational companies to become creative not only in developing products and services, but also in revamping business models, marketing strategies and operational efficiency.

The implications of these trends are critical to the success and survival of Canadian companies. They will have to compete with private Chinese companies as they expand into Canada, and with other foreign companies that are sharpening their capabilities through China-driven innovations.

In short, Canadian companies need to fully understand the characteristics and developments in their respective industry in China. Failing to prepare for Chinese competitors could dramatically affect the growth, profitability and even sustainability of Canadian businesses.

At the very least, it's time for Canadian companies to work out strategies to deal with Chinese competitors, and to do so with a sense of urgency. It isn't difficult to carry out a competitive analysis of market segments in China and to stay informed. But it does take commitment and recognition of the need to adapt.

Better learn as much as we can now. India will be next.   - 2010 March 12   GLOBE & MAIL

TRENDS & POLICIES:
 

Kids are worried about their future

In recessions gone by, faith in pensions has traditionally been of some consolation to working Canadians.

Predictions of an impending pension crisis, however, have rattled confidence in the country's retirement system, says a recent national poll published in the March issue of Policy Options.

Nearly half of Canadians lack confidence that company pensions will be able to deliver on promised payments in the future.

And a wide majority worry those private plans will at least have to reduce benefit payments.

"We're almost seeing the death of the perception of a blue-chip pension," said Nik Nanos, president and CEO of Nanos Research.

The prevailing outlook for public pensions is only slightly less bleak.

Four in 10 lack confidence that CPP/QPP will remain viable, and most have concerns over liquidity of the funds.

Mr. Nanos called it a remarkable level of pessimism borne of a number of high-profile pension failures, most notably Nortel. "This should be a massive wake-up call for pension plan funds," he said.

The stock market crash inflicted enormous losses on many pension funds, left huge underfunded liabilities and struck at the heart of retirement plans for thousands of Canadians.

And while Parliament considers legislating reforms, anxiety over retirement security is peaking, Mr. Nanos said.

Interestingly, younger Canadians are far more pessimistic than those already retired or approaching retirement, he said. About 70% of those over 60 years old have faith in the viability of public pensions plans. But less than half of those in their 30s and 40s have confidence that CPP/QPP will be healthy enough to provide benefits upon their retirement.

And 75% of respondents aged 30 to 39 believe that both public and private plans will have to reduce their payments in the future to remain viable.

Those perceptions, however, are far removed from reality, particularly regarding the public system, according to Keith Ambachtsheer, director of the Rotman International Centre for Pension Management at the University of Toronto. A recent study conducted by an independent panel of actuarians found that CPP is 100.2% funded, he said.

"This thing works. It's more a question of how we convey that to younger people," he said.

Concerns about the viability of QPP, however, may be more legitimate, Mr. Ambachtsheer said.

In Quebec, where birth rates are lower, the demographic projection for the replacement of retiring workers falls short of the rest of the country, he explained.

"They have to figure out how to get sustain-ability, because currently their numbers don't work."

On the private side, widespread anxieties over the stability of pensions are unfounded, Mr. Ambachtsheer said.

The Canadian workforce consists of roughly eight million full-time workers earning more than $30,000 per year. Roughly half of them participate in a company or public service pension, while half do not.

"More than likely, those four million are going to get their pensions," he said.

Try telling that to the more than 100,000 Canadians whose pension benefits were affected by the rash of corporate bankruptcies, said Diane Urquhart, a former bank executive now working as an independent financial consultant who has done some work for former Nortel workers

"What we have observed is a deficiency in Canada's social security net," she said. "We are behind in protecting private pension money."

Canadians are justified in their reservations over private coverage, Ms. Urquhart said. "For the general public, they're now aware that pensions aren't secure," she said. "They're becoming educated in a proper manner."

In regards to CPP, however, the poll numbers indicate a distinct lack of education and communication, Mr. Nanos said.

The retirement of Baby Boomers both reduces the number of Canadians contributing to CPP/QPP and inflates the ranks of those drawing benefits, he said, creating a double-whammy effect that darkens the outlook of younger workers.

"It doesn't take an actuarian to see there's going to be some reckoning," he said. "There could be a better job explaining how those two forces can be reconciled."

Meanwhile, doubts over future pension stability will influence behaviour, for better or worse, Mr. Nanos said. "Money that could be spent now is probably going to be held."

The Nanos poll surveyed 1,001 people by telephone and is considered to be accurate to within 3.1 percentage points, 19 times out of 20.  -   2010 March 12   FINANCIAL POST 


Canada's Foreign Policy
   - GLOBE & MAIL Op-Ed   2010 January 23

Canadians must think beyond US border

Mark Carney delivered a speech this week that was a model for a central banker: clear, precise, descriptive of the economy's recent past and current status – but also prescriptive. Whether Canadians pay heed to his analysis is another matter.

The Bank of Canada Governor offered what we might call the straight goods, without the floss and spin that accompany political speeches. His straight goods can be read with optimism or apprehension, or a bit of both, depending on how Canadians respond to the challenges he identified.

The Canadian economy got battered during what Mr. Carney called the “short, sharp recession.” Industrial production fell 15 per cent, 400,000 people became unemployed and real GDP dropped 3 per cent. Nonetheless, Canada came through the recession better than other advanced industrial countries because it had a strong fiscal position, courtesy of previous budgetary surpluses and balanced budgets, and a properly financed and regulated banking system.

Recovery is now under way, but will growth eventually return to the 3-per-cent range that prevailed for most of the years before the recession? Mr. Carney didn't answer the question, but a reasonable reading of his analysis suggests that a whole lot of cards would have to fall right for 3-per-cent growth to return.

He listed four developments, for instance, that would have to occur for “securing strong, sustainable and balanced” global growth: “fiscal consolidation” in the United States and several other advanced industrial countries (Japan, Britain, Germany and France), more U.S. household savings, higher domestic demand in China and other emerging markets, and an appreciation of countries with large current account surpluses (read China).

U.S. “fiscal consolidation” is a pipe dream. The country's deficits are enormous, its debt staggering, its political system deadlocked. If a significant improvement in the U.S. balance sheet is critical for world growth, forget it. If anything, the huge amount of U.S. borrowing destabilizes the world economy and certainly weakens U.S. power in the world.

Japan's new government doesn't appear capable of getting a grip on that country's woeful deficit and debt situations. Europe's big countries are saddled with large deficits, and some of the small ones (Greece, Portugal) are listing badly.

As for China's allowing its currency to float upward, forget that, too. The Chinese are relentlessly pursuing their own self-interest on a range of issues, including not playing by the rules of international trade and monetary exchanges. By keeping its currency artificially low, China stimulates its exports, creates domestic jobs and nails everyone else. Who's going to take the Chinese to task?

A domestic challenge, arguably the most important yet most difficult of all: Canada's “abysmal” productivity. Mr. Carney was refreshingly honest in saying that “the bank does not entirely understand why productivity growth has been as slow as it has been.” Modesty from a central banker? Yes, miracles do happen.

Place poor productivity next to the problems of the U.S. (Canada's largest trading partner), then throw in the aging population (the issue so few people want to talk about), and the result could be growth at 2 per cent instead of 3 per cent for the next decade. That doesn't sound like much, but Mr. Carney predicts that such a gap would lead to a cumulative loss of income of $30,000 for every Canadian.

Mr. Carney didn't go further. He could have warned that slower long-term growth would hurt government finances by diminishing future revenues, thereby weakening fiscal positions. It would force governments to cut spending seriously and/or raise taxes (unless they wanted to borrow more and more). We know these are political options that all governments (and citizens) find unpalatable.

The U.S. is burdening itself with debt, postponing days of fiscal reckoning. Huge structural changes, meanwhile, are occurring in the world economy. The challenge for Canadian business, Mr. Carney argued, is to move beyond the cocoon of the North American economy.

He put the challenge squarely: “Canadian business will need to develop new markets as the traditional advantage of relatively open access to U.S. markets becomes less valuable. To seize new opportunities, our productivity levels must improve.” Again, good luck to him. The mere mention of the word “productivity” so frightens and confuses Canadians that their politicians dare not mention it.

Yesterday's news about the easing of Buy American restrictions on Canadian companies was obviously welcome. But in the great scheme of shifting world economic patterns, the changes aren't much.

At issue, instead, is whether Canadian businesses can think beyond the U.S. market. If not, Canada will be missing most of the new economic action. It's a hard challenge for a country with so many branch plants, so few head offices, so much self-satisfaction, and a long tradition of looking only south.  - 2010 February 6    Globe & Mail

CANADA'S UNIQUE VALUES

Assimilation

Canada has the luxury to ponder such issues.

 

- 2010 March 24   VANCOUVER SUN

 DAN MUZYKA article: 

The past several months have been an interesting time to observe perceptions and opinions about the nature of the economy and its relationship to government. We have had a federal election, an economic meltdown of titanic proportions and, in British Columbia, a provincial election.

All of this has made me very reflective about the nature of business and the economy, and what managers and politicians need to understand about a free-market economy in a globalized world. We have reached a point in our country where we need to recognize reality and have all political parties, no matter what their colours, mature in their discussions of our political-economic challenges - rather than encouraging the occasional fanciful flight from economic reality. It is important that business aid in this dialogue by recognizing and conveying those realities.

So what, in my reflective opinion, are they?

Business creates wealth, government redistributes it. It is interesting how many people think that government is the source of wealth. It isn't. It is through the efforts of business and its employees that we create wealth and resources that governments use to deliver social, health and educational services.

Markets are a powerful force. We live in an interconnected world, with overlaying sets of markets. Defying market forces for the sake of some desired political outcome may be achieved in the short run, but at great cost. Markets around the world are more linked today than ever before. One cannot stop the merry-go-round and get off by establishing barriers and rules without introducing costs and dysfunction.

Capital moves. We may put more rules and regulations in place to observe capital flows, but the reality is that capital flows from places where it will realize a low return to places where the return is higher. If one creates a good environment for capital investment (which includes skilled workers, appropriate regulation, comfortable living environment, competitive taxes, etc.), capital will invest. The reverse is also true. If you introduce punitive local taxes on industrial sites, coupled with high corporate taxes, companies move or become uncompetitive.

At the same time, free enterprise without appropriate regulation is weak. We cannot maintain market forces and competition without it. The current credit meltdown has demonstrated that. Having said this, the issue is one of balance. We need appropriate referees and guidelines to ensure proper play. But too much regulation and the burden overwhelms the game.

Risk has two sides. We know that humans have all kinds of decision biases around risk. We need to recognize that there may be a "risk/return" relationship in that the average expectation is to realize a certain return given a level of riskiness in our investments. However, there are no guarantees.

Structural problems are just that. Reading the headlines about some of our basic industries today gives me a real sense of déjà vu. Yes, I'm old enough to remember the 1970s, including disco, polyester suits and long lineups at the gas pumps. And yes, I'm old enough to remember the dialogue about the same problems in industries like the auto sector. If we don't deal with problems because they just aren't painful enough in better times, they will come back to haunt us in the next downturn - only worse.

Externalities come back to haunt. Business has increasingly come to realize that society - in which its management and employees live - has become humourless about declaring issues like pollution or industrially exacerbated social issues to be outside their domain. Management must work with its communities and government to find solutions we can all work with.

Subsidies are bad and become addictive. While selective, one-time subsidies may be helpful in attracting or launching a business, but there is strong evidence that subsidies lead to addictive behaviour. Bureaucrats become addicted to giving them out, and companies come to rely on them, even in good times.

Bailouts are no free lunch. When we bail out something, we are taking money we could invest in our society and enterprises in the future and spending it today. Also, we are taxing people now and later to pay for misfortunes and misjudgments of the past.

It is what you negotiate and what you are worth. Management and labour have a problem: We have the misperception that high wage settlements are great for unions and their members. That may be true in the short term but, in the long term, you have to be adding enough value to justify the wage rates. Otherwise, the rest of us end up paying for the problem - which simply isn't fair to people - blue or white collar - in other industries.

Value added and productivity are the keys to success. We need to create more value than others and do it more productively. This applies even to governments that are providing social, health and educational services. We need to be asking questions about how productive our government service delivery is, not just how much they are investing in it.

Innovate or wither. Focusing on propping up what exists - or worse, what existed - for the sake of maintaining the status quo, especially with subsidies, is a road to defeat. This is true both in the economy in general and within companies more specifically. We need to focus on research and innovation, especially in Canada. We are a small country with a rich inheritance provided by our natural resources, but those resources are being depleted and we are now recognizing the total cost of exploiting them. If we wish to continue to be a relatively wealthy country, we need to learn to leverage our minds and skills in order to produce higher value added.

The next time politicians in your community ask for your vote, ask what they are going to do to boost innovation.    --2009 May 25   GLOBE & MAIL

Daniel F. Muzyka is dean of the Sauder School of Business at the University of British Columbia, where he is the RBC Financial Group professor of entrepreneurship

The Harperites get the hang of China - Globe & Mail 
>> Canada gets Approved Destination status  >>  Fragile dance >> Scoring in China

Finally, belatedly, the Harper government understands the importance of China.

Nearly everyone else in Canada figured this out a long time ago, from premiers to previous governments, from important businesses to a few academic institutions. But on arriving in office, the Conservatives – painfully unschooled in international affairs and imprisoned in ideological straitjackets – offered an approach to Beijing that mixed the snub and the lecture.

As if the Chinese cared. The whole world wanted China's attention – and its money. If one little, pretentious country of 33 million people didn't care about the Middle Kingdom, the Chinese could frankly have cared less.

There is this thing about the Harper Conservatives revealed by their policy (if we can call it that) toward China. It takes a maddeningly long time for the Conservatives to drop their ideological nostrums and face facts.

When they do, they never admit to changing course. The four senior cabinet ministers who have been to China in the past four months – the latest being Finance Minister Jim Flaherty, made scarce mention of human rights, did not hector the Chinese and, instead, talked about economics, trade and investment. (About climate change, central to the U.S.-Chinese dialogue these days, the ministers had little to say, Canada being such a laggard on the file.)

Mr. Flaherty had recently been in Brazil, where he bubbled about the importance of that country. Other senior ministers have also been to Brazil in recent months. In the spring, a boatload of deputy ministers travelled to that country.

Brazil, Russia, India and China are part of a group whose acronym, BRIC, suggests a unity of purpose not easily practised. Their leaders meet as a kind of counterpoint to the G8. Their relations are getting closer, as in trade between China and Brazil.

But they still don't have that much in common, except that they are variously unhappy with world institutions, would like to play a larger role in them, and have economies, populations or natural resources (in the case of Russia) to make the rest of the world take notice.

The Harper government, again belatedly, seems to have awakened to this new global reality, one part of which is the emergence of these countries – and the flip side of which is the relative decline of the United States.

When the Harperites took office, and for most of the time since, they were transfixed by Canada-U.S. relations. Pro-American to a person, the party leadership seemed to think that the Liberals had dirtied the well with the United States and that they would do better.

The facts, however, are that the Americans are becoming more protectionist in defending their interests, courtesy of the recession, even though the hugely popular President Barack Obama resides in the White House instead of the egregious George W. Bush.

The United States has stored up for itself years of trouble or, to be more charitable, faces a series of enormous challenges caused by ideologies, profligacies and lifestyles that will weigh down the country for a long time.

America is in debt beyond its imagination, greatly dependent on foreign oil, overextended militarily, selling less than it produces, and apparently unable to get a grip on future liabilities such as runaway health-care costs and unfunded future liabilities for Social Security.

Geography, history and shared values, among other factors, will always tie Canada to the United States. But the post-Cold War dominance of the United States is fading perceptibly, with long-term consequences for any country (read Canada) tied so tightly to its star.

Whether the Canadian business world, writ large, or the country's universities and thinkers understand this shift remains doubtful. Until recently, it was apparent that the Conservative government did not. How else to explain that Prime Minister Stephen Harper has never undertaken a bilateral visit to any of the BRIC countries.

(In fairness, the uncertainties of minority government pinned Mr. Harper to Ottawa, and caused him to organize tours scattering announcements across Canada, more than if he had led a majority government.)

That the realities of the world have slowly shaken the Conservatives' prejudices and removed their blinkers can only be welcomed, although the frustration remains about why it took so long for these realities to become apparent.   - 2009 August 19    GLOBE & MAIL  

Conference Board says Canada losing ground due to a 'failure to innovate'

High commodity prices are covering up Canada's sliding socio-economic performance relative to other advanced countries, the Conference Board of Canada says.

"We appear to be riding high due to global demand for our resources, but this is not a sustainable course for our country," the think-tank's president, Anne Golden, stated Monday.

Citing a "failure to innovate," Golden said Canada is losing ground to other countries that better exploit their own advantages.

"Unfortunately, the Conference Board has been telling this story for a dozen years, and the same issues have emerged year after year."

The Conference Board's comparison of 17 well-off countries finds Canada in the bottom half of the group in five of the six performance aspects the study assessed.

Canada's 11th-place overall economic ranking is a significant decline from its third-place position in the 1970s, with the strongest drag coming from a 15th-place productivity performance.

According to the Conference Board, Canada ranks 13th in innovation as "research is not successfully commercialized."

On the bright side, Canada is rated No. 2 in education and skills, behind Finland. Canada earns top marks for high-school and college completion rates, but still "four in 10 Canadian workers lack the basic literacy skills to cope with the demands of work in the modern economy," and "Canada does not produce enough graduates in fields that underpin innovation such as science, math and engineering."

In environmental stewardship, Canada ranks 15th out of 17, "with poor performances in greenhouse gas emissions, smog and waste generation," the Conference Board says.

"Canadians generate more waste per person than any other country in the comparison."

Canada earns a middle-of-the-pack ninth-place rating for the health of its population, and "with soaring child diabetes and obesity rates, this may be the first generation of children in more than a century to have worse health outcomes than their parents."

And in terms of general social stability, Canada rates 10th, and "some of Canada's results“ such as rates of burglary and assault, and levels of child poverty “ are shockingly poor."   - 2008 June 30   CANADIAN PRESS

Canada Moves Up in International Rankings

Canada is regaining its stance as one of the world's top places to do business. The country climbed a notch to fourth place in the annual Economist Intelligence Unit's business environment rankings. The U.S. tumbled to ninth from fourth place - its lowest spot since the survey began in 1997. In the next five years, Canada, Switzerland, Hong Kong, the Netherlands and Australia will all have better business environments than the U.S., the report said. Denmark took the top spot, followed by Finland and Singapore. Canada may be moving back up the rankings, but it's still below the No. 1 ranking it held several years ago. In a separate forecast, the group cut its forecast for Canadian economic growth next year to 2% from 2.4% because of financial turmoil and the loonie's appreciation.  - 2007 October  THE ECONOMIST

INSTITUTIONS

Omers saving for asset fire sales

With governments around the world preparing to hold yard sales to raise cash, Michael Nobrega has his piggy bank ready.

The chief executive officer of the Ontario Municipal Employees Retirement System said his fund, one of Canada's largest, has been liquidating holdings to ensure it has the cash to take advantage as the public sector sells off assets to rein in massive deficits.

"I think at some point in time, the governments have to dispose of assets," Mr. Nobrega said.

"And if we're not liquid, if we don't have the resources at hand to take advantage of that, then we would not be able to reach out for them."

The first targets could be in Ontario, where provincial government officials have confirmed they are examining the possibility of selling stakes in assets such as the Ontario Lottery and Gaming Corp., the Liquor Control Board of Ontario and electricity generation and distribution companies Ontario Hydro and Hydro One.

He would not comment on which of the Crown corporations OMERS would prefer to bid on, saying he is interested in "all the assets going."

Another anticipated seller is the British government, where Prime Minister Gordon Brown has announced a plan to sell up to $25-billion (U.S.) in government assets to cut the country's budget deficit by half over the next four years.

The largest privatization since the Thatcher era could see assets such as the English Channel rail link and the ferry port of Dover sold to global buyers.

Mr. Nobrega said other opportunities "will inevitably arise" as major countries such as the United States and Japan accumulate "unsustainable" debts that exceed more than 100 per cent of their gross domestic products.

Most government deals would be done with a consortium of investors because the assets are so large, he added.

"They'll be either outright sales or partnerships with governments," he said.

OMERS, which invests pension assets for municipal government employees, yesterday reported a 10.6-per-cent return on its investments in 2009, a turnaround from a loss of 15.3 per cent in 2008.

The fund's asset base grew by $4.3-billion to $47.8-billion at Dec. 31.

The fund is the second major pension plan to report its 2009 financial results.

Last week, the Caisse de dépôt et placement du Québec reported a 10-per-cent gain on its investments last year.

Both funds lag the median 15.5-per-cent return posted by large Canadian pension funds in 2009, according to a survey by RBC Dexia Investor Services Ltd.

OMERS chief financial officer Patrick Crowley said the fund reduced its holdings in public equities in early 2009 as part of a longer-term plan to shift more into private investments, including infrastructure assets, real estate and private equity holdings.

The fund currently has 61 per cent of its assets in public debt and equity markets and 39 per cent in private holdings, but plans to reduce the public component to 53 per cent in the next few years.

While most of the fund's asset classes posted better returns in 2009, the real estate division - Oxford Properties Group - saw returns fall to 1.3 per cent from 6.7 per cent in 2008.

Mr. Crowley said the decline was due to a writedown in asset values on hotel and industrial properties because of mark-to-market accounting rules.

OMERS also said its pension fund deficit grew last year to $1.5-billion at Dec. 31 from $279-million at the end of 2008 because pension obligations grew at a greater pace than investment returns.

Mr. Nobrega said some of the deficit will be made up through investment returns.

However, he said it is up to OMERS's sponsors to decide whether to also increase member contributions or change the plan's design to deal with any remaining shortfall.    - 2010 March 2  GLOBE & MAIL

Taking stock of 2009 urban real estate investment opportunities in Western Canada
Vancouver, Calgary or Edmonton: which is the best commercial play among the region's top-tier cities?

Western Canada's three top-tier cities have each been hit by the economic downturn that has ravaged Canadian commercial real estate markets, but Vancouver, Edmonton and Calgary also offer unique opportunities for investors into 2009.

VANCOUVER

Vancouver enters 2009 ranked as the top real estate market in North America, according to the Urban Land Institute's Emerging Trends in Real Estate report.

Undertaken in partnership with PricewaterhouseCoopers, the long-running annual publication surveys a wide variety of factors affecting real estate markets around the world. According to the survey, Canada, with its less-volatile markets, stands to be more stable but will still experience a slowdown as the U.S. grapples with the myriad woes it faces.

However, the institute said that Vancouver offers the prospects for new development and investment because almost every class of property – office, industrial, multifamily rentals – is reporting low vacancies.

Office: Vancouver's downtown office vacancy rate is expected to remain near 2% in 2009, but this is due more to a lack of new product than rabid demand. Vancouver is seeing unprecedented sublease space returning to the market. In the fourth quarter of 2008, about 585,000 square feet of sublease space was on the market, primarily in the downtown core.

Downtown Vancouver consequently posted the first negative absorption in six years during the last quarter of 2008.

Avison Young is forecasting that 2009 office take up will likely remain below historical levels and cautions that landlords may turn to tenant inducements as they compete for deals.

Industrial: As a major port city, Vancouver has had one of the strongest industrial real estate markets in Canada, but 2009 will be a year of contraction, most analysts believe.

With speculative construction largely in check, land sales slowing and demand softening for warehouse distribution and manufacturing, the outlook is for a slower, though stable industrial sector this year. Expect to see lower land and leasing rates if the current trends continue.

Retail: Vancouver's retail sector's vacancy rates have nearly doubled to 4.1%, and a number of projects have been put on hold as developers feel the pressure of a slow economy.

Retail spending right across B.C. increased just 2.2% in the last half of 2008, compared with a 6.7% increase in 2007, according to the International Council of Shopping Centers. Retail sales in B.C. are forecast to fall a further 1.2% in 2009, erasing almost all the increases in sales in 2008, according to Central 1 Credit Union.

Multi-family: Once the commercial market's hottest sector, sales of Vancouver apartment buildings fell nearly 50% in 2008, with little recovery expected this year. Still, with a tight vacancy rate at 0.7%, landlords will have no trouble renting space this year: the problems will come when they attempt to sell, according to a study from McDonald Commercial in Vancouver, which notes a "gap" between asking prices and what investors are willing to pay.  >> MORE

Calgary

Office: Eight office towers are under construction in Calgary, including the 58-storey Bow building, but there are signs of demand weakening and a tightening of credit. H&R REIT, for instance, recently had to refinance the Bow tower construction, despite the building's lease to Encana Corp.

There is an estimated 4.8 million square feet of office space coming to the Calgary market this year and into 2010.

The oil industry accounts for 75% of Calgary's downtown office space, so when oil prices fall 50%, as they did over the past year, the impact is considerable.

Vacancy rates in existing buildings are up to 4.2%, considerably higher than the level over the past two years. Landlords in Class B and C buildings have already seen lease rate reductions, and sublease space is increasing, signalling a further rise in vacancy rate this year.

Industrial: Despite the downturn and a parallel sharp spike in vacancy rates, Calgary's industrial sector remains among the best in North America, according to Grubb & Ellis. Calgary's 4.1%vacancy rate ranks it seventh among the continent's top-10 markets. Still, the vacancy rate just a year ago was below 1%, an indication of how quickly the market has constricted.

Retail: Calgary's resilient consumers have finally slowed their spending and, combined with a huge amount of retail space – two million square feet of new product will come on stream this year – the retail outlook is grim.

Retail vacancy rates are forecast to increase to more than 4% this year, from 1% in 2008, and lease rates are expected to soften.

Multi-family: Calgary's residential apartment vacancy rate is now pegged at 2.1%, up from 1.5% a year ago, and the days of double-digit rent increases have waned. But, with in-migration to the city forecast to rise 2.8% this year to 18,500, demand for rentals is expected to remain strong.

Edmonton

Office: Edmonton's downtown office vacancy rate hit a record low of 4.8% last year, but vacancies are projected to rise in 2009. The downtown is seeing a flight of tenants to the suburbs seeking lower rates and modern space, according to Avison Young, which expects the vacancy rate to reach 6% by mid-year. Sublease space is increasing, as major oil industry projects are put on hold.

Industrial: The overall vacancy rate remains around 1.5%, which makes Edmonton one of Canada's strongest industrial markets. Cutbacks in the oil industry, however, are expected to flatten land price increases and lease rates in 2009.

Retail: With retail sales forecast to hit $20.2 billion in 2009, up from $19.4 billion in 2008, Edmonton's retail sector is perhaps the most promising play in Western Canada.

The overall retail vacancy rate is 2.5%, the lowest in 15 years.

Multi-family: Sales of apartment buildings in Edmonton have plunged 80% early in 2009, compared with a year ago. "In the first month of 2009 we are seeing a lot of interest from purchasers who are looking for great deals," said Paul Chaput, Avison Young multi-family investment sales specialist. "We expect things will change in 2009 – more transactions at prices supported by the income fundamentals of the property."

The apartment vacancy rate is now 2.4%, up from 1.5% a year ago.

Last year, Edmonton rents increased an average of 8.9% year-over-year. Cushman and Wakefield forecasts an increase of 3.5% for 2009.

The average price of an Edmonton apartment building sold in 2008 was $116,300 per suite, but vendors are "pricing aggressively" this year, and prices are expected to ease.    -  2009 February 16    BUSINESS IN VANCOUVER

Conference Board says Canada losing ground due to a 'failure to innovate'

High commodity prices are covering up Canada's sliding socio-economic performance relative to other advanced countries, the Conference Board of Canada says.

"We appear to be riding high due to global demand for our resources, but this is not a sustainable course for our country," the think-tank's president, Anne Golden, stated Monday.

Citing a "failure to innovate," Golden said Canada is losing ground to other countries that better exploit their own advantages.

"Unfortunately, the Conference Board has been telling this story for a dozen years, and the same issues have emerged year after year."

The Conference Board's comparison of 17 well-off countries finds Canada in the bottom half of the group in five of the six performance aspects the study assessed.

Canada's 11th-place overall economic ranking is a significant decline from its third-place position in the 1970s, with the strongest drag coming from a 15th-place productivity performance.

According to the Conference Board, Canada ranks 13th in innovation as "research is not successfully commercialized."

On the bright side, Canada is rated No. 2 in education and skills, behind Finland. Canada earns top marks for high-school and college completion rates, but still "four in 10 Canadian workers lack the basic literacy skills to cope with the demands of work in the modern economy," and "Canada does not produce enough graduates in fields that underpin innovation such as science, math and engineering."

In environmental stewardship, Canada ranks 15th out of 17, "with poor performances in greenhouse gas emissions, smog and waste generation," the Conference Board says.

"Canadians generate more waste per person than any other country in the comparison."

Canada earns a middle-of-the-pack ninth-place rating for the health of its population, and "with soaring child diabetes and obesity rates, this may be the first generation of children in more than a century to have worse health outcomes than their parents."

And in terms of general social stability, Canada rates 10th, and "some of Canada's results"  such as rates of burglary and assault, and levels of child poverty" are shockingly poor."    - 2008 June 30   CANADIAN PRESS

New construction soared in Canada

Canadians will begin work on 225,700 homes this year, an unexpected gain from last year and the highest level of new construction since 1987, the government's housing agency says in its quarterly forecast.

The agency, Canada Mortgage and Housing Corp, had predicted in May that housing starts would drop to 208,500 units this year from a 15-year high of 218,400 last year. Mortgage rates had stayed near five-decade lows, underpinning demand, the agency said in issuing the revised numbers.

"Although rates have risen, they remain very low and together with solid employment and income gains will propel housing starts," Canada Mortgage and Housing's chief economist Bob Dugan said.

The Bank of Canada said in its latest policy report on July 22 that it was counting on domestic spending to power growth in the world's eighth-largest economy this year. Policymakers also increased their estimate for housing construction in the report, predicting it would account for 0.5 per cent of economic growth, up from 0.3 per cent in April.

The report covers single-family houses, flats and condominiums.

Canada's economy would expand 2.75 per cent this year, up from 1.7 per cent last year, the central bank said.

Canada's gross domestic product is about C$1.1 trillion (HK$6.53 trillion).

The pace of construction would cool next year as mortgage rates continued to rise, dropping housing starts to 204,200 units, Canada Mortgage and Housing said.

Existing home sales would increase 5.1 per cent to 457,000 this year, and fall to 433,100 units next year, the agency said. Canadians would continue spending more on renovations: C$36.3 billion this year, a 9.1 per cent gain from the previous year; and $38.5 billion next year, a 6 per cent increase.   -    2004 August 11      BLOOMBERG 

Canadians are taking advantage of boom to buy second properties

To understand why Boomers are investing in real estate simply look at how much prices have gone up. A decade of capital appreciation in the residential market has convinced many middle-aged consumers to make real estate investing not just about the home they are living in, but about a second property.

"In the early to mid-1990s, people had a sense that real estate wasn't a good investment. It wasn't going to keep pace with economic growth. People would purchase homes for lifestyle reasons only," says Peter Norman, a senior economist with Altus Clayton, a real estate research firm. "The tide turned as values started to increase. We've had a housing cycle in the last 10 years where house prices have increased at a steady to fast pace. When you see values steadily climb, that appeals to most people. And then you have stock markets go through two undulations: the tech crash and the [subprime] financial crisis."

The average price of a sold home across the country through the first nine months of this year reached $324,312, according to the Canadian Real Estate Association. A decade ago, the average price of a home sold across the country was $154,606.


What Is A Boomer? The demographic cohort, by the numbers . Born between 1947 and 1964 . Boomers are less likely (52%) than either young adults (63%) or seniors (62%) to reject the idea that there is no use worrying because tomorrow usually takes care of itself. . Boomers are more likely (11%) than Generation Y (2%) to report not having any savings plan at all. . While the tendency to live beyond your means decreases with age, Boomers (20%) land closer to young adults (33%) than to their parent's generation (8%) in doing so. . Boomers are saving for home renovations (30%), followed by a dream vacation (23%). SOURCE: HSBC DIRECT SAVINGS SURVEY FOR HSBC BANK CANADA BY INNOVATIVE RESEARCH GROUP
- Photograph by : Deborah Stokes, Kagan McLeod, National Post

A Statistics Canada survey shows real estate investing has been on the upswing over the past six years. The federal agency's Survey of Financial Security found the dollar value of real estate holdings, not including principal residences, rose 80.5% from 1999 to 2005.

The median net worth of the nation's 13.3 million families was $148,400 in 2005, up 23% from a 1999. The median net value of a principal residence was $87,000. The median value of other real estate was $85,000, but the corresponding figure for debt was $90,000 --an indication many Canadians are financing second properties and hoping for some capital appreciation.

"A significant change in the composition of assets during the six-year period was growth investments in real estate such as cottages, timeshares, rental properties and other commercial properties," says StatsCan.

Mr. Norman says second-home ownership goes up as people age. On a national basis, only 2% of households headed up by someone under the age of 34 have a second home. It is 7% for people 35 to 45 years old and peaks at 12% for people in their 50s, says the economist. By the time people hit 65, they sell their second properties.

"It's really hard for surveys to quantify this sort of thing because there is so much diversity of product. Sometimes, you have a family owning a cottage and people using it, other times people have a cottage, use it two weeks of the year and then rent. That's more of an income property. Then you've got timeshares where the investment can be very low," says Mr. Norman.

The numbers he cited for second-home ownership do not even include investment property and, therefore, the condominium market. Some have suggested as much as 25% of the condominiums in Toronto and Vancouver are owned by investors.

Arn, a sales representative with Re/Max Unique, says he knows who is buying and they are older professionals looking for an investment property. He says the rise of the luxury hotel/condominiums like Trump Tower, the Shangri-La Toronto and the Four Seasons Hotel and Residences -- trophy buildings -- is being driven by these investors. "They're in their mid-40s, they're professionals and they usually have a net worth of $5-million to $10-million," says Mr. Arn.

A survey by Royal LePage Real Estate Services on the luxury housing market found 25% of homeowners with $1-million principal residences own a second property. Another 6% own three properties and 2% own more than five properties.

Don Lawby, president of Century 21 Canada Ltd., says he's noticed the trend of older couples refinancing the mortgage on their principal residences for an investment. "It's usually a second property that they plan to rent," says Mr. Lawby. "Sometimes it's so they can buy recreational property."

He says second properties can be difficult to finance but if you have plenty of equity in your main residence, it is easy to use that cash for other purposes. "There are a lot of people buying second homes now. It's not even just recreational properties. It's investment properties. The market has been good, so they are buying."   - 2007 October 20    NATIONAL POST    by Gary Marr   

Where the average family's money goes

The average B.C. household spent more on shelter last year than any other living expense -- more than food, clothing and health care combined, according to Statistics Canada figures released Wednesday.

Statistics Canada said the average B.C. family spent a total of $57,352 last year and $11,954 of that total was spent on shelter.

"That's not surprising when you look at housing prices in B.C., particularly in the Lower Mainland, because they are substantially higher than the rest of Canada and it has been that way for many years," Business Council of B.C. economist Ken Peacock said.

Personal income taxes took the second biggest bite out of the B.C. family budget -- at $10,872 -- followed by transportation ($7,309), food ($6,535) and recreation ($3,695).

The average B.C. family budget grew by three per cent last year and the total was slightly below the national average of $57,730.

Peacock said B.C. household spending will likely remain near the middle of the pack among Canadian provinces for a while longer.

"We're pretty much going to be stuck there because I don't see B.C. outperforming Canada in terms of income growth and living standards," he said. "There are no big upward surprises there soon."

Some economists say slow income growth in B.C. has led to higher borrowing and lower savings rates in the province and a recent TD Bank study said B.C. households are the most deeply in debt in Canada.

Statistics Canada said the Northwest Territories had the highest average household budget in Canada -- at $68,310 -- followed by Alberta ($65,570), Ontario ($64,370), Yukon ($63,580) and B.C.

Newfoundland households had the lowest average budget in the country, at $46,650.

Nationally, personal taxes claimed the largest portion of family budgets, accounting for about 21 per cent of total spending. Shelter claimed about 19 per cent, followed by transportation (13 per cent) and food (11 per cent.)

Vancouver residents had household budgets that surpassed the national average last year, at $64,928, while Victoria was below the national average, at $50,806.

But Victoria residents were more generous when it came to gifts and contributions -- spending $2,244 compared with $1,492 for Vancouver residents.

Vancouver households spent more than twice as much as their Victoria counterparts on gambling -- $233 compared with $111 -- and 50 per cent more on liquor and tobacco -- $1,274 compared with $831.

StatsCan said that average household in Canada spent $6,430 on food last year, about $210 more than in 2000.

"The increase in spending on food was due mainly to higher spending on restaurant meals, which rose about 10 per cent to $1,430," the federal agency said.

But spending on gasoline and other fuels for vehicles declined 5.9 per cent to an average of $1,840 for households reporting such expenditures. The drop was more than double the decline in gas prices, which fell 2.6 per cent last year.

The StatsCan survey said 60 per cent of Canadian households owned a computer last year, compared with 55 per cent in 2000 and 50 per cent in 1999.

Household spending on tourism held steady across Canada last year, with 35 per cent of households spending an average of $860 on hotels and motels. About 20 per cent of households spent an average of $1,550 on air travel while 11 per cent spent an average of $2,990 on package tours. - 2002  December 12    VANCOUVER SUN   Bruce Constantineau 

PROPERTY | OFFICE MARKETS

Three different cities, one theme 
Toronto, Calgary and Vancouver may be poles apart, but their office landlords (merrily) sing from same sheet

They are as different as cities get and yet today they share a common bond.

There is Toronto, Canada's financial centre with about 140 million square feet of office space of which 74.4 million is downtown. Then there is Calgary, a boom town by any measure, where world demand for energy is creating a rush to add to its existing stock of 47.8 million square feet of office space. Finally, there is Vancouver. Surrounded on three sides by water, that city offers 38.8 million square feet in total with slim prospects for adding more downtown.

What binds them together is seven years of economic prosperity, which has led to office vacancy rates in the low single digits and the prospect for rental increases higher than anything seen so far this decade.

"Those three are very different indeed, but what they do share is a landlord's market for office space," says Wayne Barwise, vice-president of office development at Cadillac Fairview Corp. Ltd. in Toronto. "Vacancy rates, especially in the downtown cores, are so low that available space is nearly negligible."

The results, he adds, are rental increases that can run as high as 15 to 20 per cent for new or renewed leases, depending on the building.

In Vancouver the impact has been quite dramatic.

"We have seen rents increase about 40 per cent over the last 24 to 36 months," says Aaron Ulinder, associate vice-president in CB Richard Ellis Ltd.'s Vancouver office. "While A-class-space rents average maybe $31 a square foot net, we are seeing landlords get $40 a square foot in some buildings, and on some floors with great views."

At the end of June, Vancouver's downtown had a 3.5-per-cent vacancy rate and the Greater Vancouver area stood at just 6.6 per cent.

In Calgary, the story is similar. Its downtown area had a 2.8-per-cent vacancy rate and, over all, the city sat at 2.9 per cent. In effect, there was virtually no space available.

Greg Kwong, managing director for CB Richard Ellis in Alberta, says newer office buildings are able to command in the high $30- or low $40-a-square-foot range. "They can even get that in many class B buildings if they can find enough space to suit the needs of major tenants."

In Toronto, the bank towers in the central core have a vacancy rate of just 2.7 per cent, rising to 6.4 per cent for the overall downtown area. Experts are predicting rents to tick upward anywhere from 10 to 15 per cent within the next 12 months.

But aside from unprecedented demand for office space and tight markets, those three cities appear to share very little else in common, the experts says.

"They are very different," says Tom Farley, president of Canadian operations for Brookfield Property Corp. "Toronto is a mature market with a healthy mix of residential, retail and commercial throughout the downtown area. Vancouver is restricted when it comes to adding new downtown space because it is surrounded by the ocean, the mountains, the U.S. border. A condominium boom has snapped up building sites that might have gone for office space, and Calgary is undergoing an unprecedented boom because of global demand for Western Canadian oil."

Aaron Ulinder, associate vice-president in the Vancouver office of CB Richard Ellis, says that city differs from the others in the size of the average tenancy.

"As a branch office city, the size of the average tenancy would be maybe 5,000 square feet, compared with 15,000 to 20,000 in Calgary and 30,000 and up in Toronto," he says. "Tenants seeking 2,500 square feet are par for the course."

What that means is that developers are reluctant to create new buildings on spec even with tight market conditions.

"There is much more risk involved," says David Bowden, president of Colliers International Canada. "Size of tenancies is small and that impacts the ability to fill buildings quickly."

Vancouver will see little relief from the current tight market until 2010 or 2011, Mr. Ulinder predicts. Two new projects totalling about 650,000 square feet are expected to come on stream in that period. Bentall Corp. is planning a 400,000-square-foot tower at Thurlow and Alberni Streets, and Aquilini Investment Group plans an office tower on the northwest corner of the GM Place site.

Calgary is an anomaly, says Mr. Kwong at CB Richard Ellis. "I always explain to people that we have only one million people, a fraction of the population of either Toronto or Vancouver, but the highest per capita ratio of office space in the country."

Yet despite the total amount of office space, demand has far outstripped supply. He says one million square feet will have come onto the market this year, followed by another 2.5 million next year and almost all that space has already been snapped up.

"The spec market is thriving. Three years ago developers announced 2.5 million square feet of new space in four separate building and within months of those announcements between 25 per cent and 45 per cent of that space had been spoken for."

The main challenge going forward is the impact that the increase in provincial royalties on energy will have, he says.

"Let's say the foot is still on the gas pedal but easing up slightly. I can't see a bust as long as people drive cars."

Tale of the tape of three cities : OFFICE MARKETS

Toronto
Inventory (sq. ft.) 43,348,531
Vacant space 2,209,526
Vacancy 5.10%
Year-to-date absorption 984,842
Under construction 3,361,044
Net rental rates $22.76
Taxes and operating costs $22.80
Completions through 2008 996,017

Calgary
Inventory (sq. ft.) 18,424,421
Vacant space 449,469
Vacancy 2.40%
Year-to-date absorption 1,063,385
Under construction 5,606,300
Net rental rates $43.90
Taxes and operating costs $15.08
Completions through 2008 934,115

Vancouver
Inventory (sq. ft.) 9,790,828
Vacant space 224,449
Vacancy 2.30%
Year-to-date absorption 111,951
Under construction 238,000
Net rental rates $29.13
Taxes and operating costs $17.13
Completions through 2008 372,500
- 2007 November 6   GLOBE & MAIL    Source: CB RICHARD ELLIS LTD   

Vancouver and Montreal tops in real estate market

Montreal and Vancouver have the healthiest commercial real estate markets in the country, according to a survey from Moody's Investors Service. 

Moody's looked at space in office, retail, industrial and apartment complexes and considered how supply was meeting demand in determining its ranking. 

"A place like Toronto probably has too much supply because of some of the big-box stores like Wal-Mart that are being built," said Sally Gordon, vice-president and senior analyst at Moody's. 

The strength of a market, based on whether supply and demand were in balance, was measured from zero to 100, with cities scoring zero to 33 considered under stress because of imbalances between supply and demand. Cities scoring from 34 to 66 were considered to be on the cusp of imbalance and everything above that was an ideal score. 

Compared with the United States, Moody's said the Canadian real estate market was considerably stronger, but the United States topped Canada in the retail sector. 

"Moody's survey and its scoring system confirm the traditional wisdom that Canada lags the United States in the real estate cycle and is, therefore, still in a stronger phase as the U.S. economy shows signs of weakness," said Ms. Gordon. 

Montreal tied for first due to its showing in multi-family housing, or apartments, where it scored a 98. Overall, Montreal finished with 86. 

Vancouver finished with the same score, powered by the fact it was the national leader in office space. Behind Montreal was Winnipeg with an 85, Ottawa with an 83, Edmonton at 82, and Regina at 78. 

Toronto with its oversupply of space in the retail sector, finished seventh with a score of 75. The city was followed by Calgary at 74 and Halifax at 71. 

The nine major markets surveyed represent about 50% of the population and employment in Canada. 

In comparisons with the United States, Canadian multi-family housing was the country's strongest segment, scoring 96 compared with 81 in the United States. But retail dragged the country down with a 67 in Canada compared with 76 in the United States.  - by Gary Marr, National Post

DISTINCT Canadian Characteristics
Canadians keener to trash talk bad firms

Canadian consumers are increasingly likely to boycott and badmouth untrustworthy companies, according to the 2007 Edelman Trust Barometer, which was presented Wednesday in Toronto.

The annual survey of global opinion leaders found that 86 per cent of Canadian respondents refused to buy products or services from brands they don't trust, up from 76 per cent a year earlier.

“It's not that Canadians are mad as hell and they're not going to take it any more, but they're certainly more activist and involved and engaged than they have been,” said Charles Fremes, president and chief executive officer of Edelman Canada.

Respondents were also more willing to banish untrustworthy companies from their investment portfolios, with 77 per cent of respondents saying they've refused to invest in such companies, up from 64 per cent last year. And 85 per cent said they've criticized untrustworthy companies to acquaintances, up from 75 per cent a year earlier

Mr. Fremes said baby boomers are a big part of that activist trend.

The survey also found that Canadian corporations are among the most trusted in the world, suggesting that Canadian brands shouldn't be shy about broadcasting their nationality, Mr. Fremes said.

Respondents in the Americas said Canadian corporations were the most trustworthy, while European and Asian respondents ranked Canadian companies second only to companies from Sweden and Germany respectively.

But within Canada, respondents were less likely to trust businesses than a year ago. Just 45 per cent of respondents said they have trust in business, compared with 57 per cent last year. That's below the trust level for non-governmental organizations (55 per cent), but higher than trust levels for religious institutions (36 per cent), media (34 per cent) and government (34 per cent).

Mr. Fremes said Canadians' declining trust in business may be related to the large number of big deals that have seen foreign firms take over Canadian companies over the past year.

Former Ontario premier Bob Rae, who sat on a panel Wednesday to discuss the Edelman results, said he is not surprised that trust in government is so low because political parties spend so much time bashing each other through advertising and the press.

“No one should be surprised that the general social effect . . . unfortunately is to lower the general impression the public has of the entire enterprise,” said Mr. Rae, who ran unsuccessfully last year for leadership of the Liberal Party of Canada against Stéphane Dion.

The survey also found that the two most important trust builders for corporations in this country were making quality products and services (cited as the No. 1 trust driver by 34 per cent of Canadian respondents) and engaging in socially responsible activities (29 per cent).

Edelman, the world's largest independent public relations firm, polled 3,100 opinion leaders in 18 countries, including 150 in Canada. The margin of error on global statistics is plus or minus 1.8 per cent, while the margin of error on Canadian results is plus or minus 8 per cent 19 times out of 20.

Opinion leaders are defined as college-educated people between 35 and 64 years of age, engaged in media, economic and policy affairs, with household income in the top quartile. - GLOBE & MAIL    2007 Feb 28

Number of head offices in Canada has been growing in recent years

report released by the Conference Board of Canada yesterday found that the number of head offices in Canada has been growing in recent years, despite a string of high-profile acquisitions of Canadian companies such as Hiram Walker, Hudson's Bay Co., and more recently, Inco and Falconbridge.

Over all, the number of head offices in Canada jumped by 100 to 4,161 between 1999 and 2005, the Conference Board found. According to Statistics Canada data, head office employment in Canada also grew by 11 per cent during that same period, despite challenges such as a more valuable Canadian currency and the rapid rise of China, India and other low-cost economies.

The results, however, weren't evenly spread throughout the country.

Head-office employment grew in Calgary by 64 per cent during that six-year period, by 28 per cent in Ottawa, and by 19 per cent in Toronto, the report found, while falling by 7 per cent in Winnipeg and 29 per cent in Vancouver.

But a head office's orientation is critical, the report says, in determining its ability to do well and grow. "For Canadian-owned multinational enterprises to prosper in a global economy and increase their head-office presence here, they must be oriented towards international markets."

Glen Hodgson, the Conference Board's chief economist, said foreign acquisitions of Canadian companies and other types of foreign investment shouldn't be feared, although the subject is too complex to be seen in either entirely positive or negative light.

There is a dramatic difference, for example, between the Canadian operations of European-based and U.S.-based companies, the report found. For many of the U.S.-based companies in the study, the Canadian operations are often among the prized assets, while the European-owned Canadian operations often saw themselves as weaker than their most important local competitors and the company's other subsidiaries.

"EU-owned subsidiaries appear to be predominantly implementers."

The Canadian arms of the U.S.-based companies were also more likely to have been able to make a difference by developing unique areas of expertise. These subsidiaries, however, were less likely to have the autonomy to develop new products and processes than Canadian-based companies.

"You really do have to peel the onion and look beneath the layers," Mr. Hodgson said.

The results were based on data compiled from 13 EU-based and 37 U.S.-based Canadian operations, and 12 Canadian-based companies.

The report also modifies recent concerns about Canadian manufacturing. Although the lucrative sector has been in decline and has shed about 200,000 jobs over the past couple of years, the report says, total employment in manufacturing remains at about the same level that it was in 1998. In contrast, the U.S. sector is about 20 per cent smaller.

Although at odds with what many Canadians may believe about the "hollowing out" of corporate Canada, the report is consistent with other recent research.

A December, 2006, report by the University of Toronto business school, for example, found that Canada's world-class companies are significantly larger and more numerous than they were 20 years ago.

In 1985, that report found, Canada claimed 33 companies that ranked among the top five in the world in their particular business, but that that number has since more than doubled to 72.

The university report also found that average annual revenue for Canada's leading companies is $3.7-billion, up from $2-billion in 1985, after adjusting for inflation. That growth has come despite the fact large companies today tend to focus on smaller niches than they did a couple of decades ago.

Twenty years ago, Canadian companies led in easy-to-understand fields such as wines and spirits, nickel, asbestos, solid-waste management and real estate. Today, according to the university study, Canadians are big winners in environmental compliance technology, postage stamps, gastrointestinal products and wollastonite, a mineral fibre used in ceramics, auto parts and concrete.  - GLOBE & MAIL     2007 Feb 28

Canada is Land of Mobility

We can finally put to rest the old canard that the rich get richer and the poor get poorer.

In fact, the rich are getting poorer. Canadian Business magazine recently reported that the combined net worth of Canada's super wealthy has dropped 7.6 per cent to $111.1 billion since last year.

Perhaps more importantly, research by Statistics Canada indicates that children of high-income parents are no more likely to be high-income earners as adults than children of low-income parents are to remain at the bottom rung of income distribution.

In fact, about a third of sons whose fathers are in the top 25 per cent of the income scale end up there themselves a generation later. Similarly, about a third of sons whose fathers are in the bottom 25 per cent stay at the bottom. (The data is gender specific, based on the income of fathers and sons).

Clearly, being born into an upper income family doesn't guarantee economic status. Roughly 20 per cent of sons with fathers in the top 25 per cent drop to the bottom quarter. And about 17 per cent of sons born to fathers in the bottom quarter are able to rise to the top 25 per cent.

Between the top and bottom, it's a free-for-all, with considerable movement to and from different income levels, giving Canada a high rate of intergenerational income mobility.

Miles Corak, Statscan's director of family and labour studies, says that in Canada, on average, only one-fifth of income advantage is passed from one generation to the next. For example, if a family were to earn 100 per cent more than the national average, statistically, their children would just 20 per cent more than average.

In the United States, the income advantage also shrinks but -- at 40 per cent -- remains twice as high as in Canada.

"Canada, with that 20-per-cent advantage, looks like a Scandinavian country where there's a good deal of mobility," Corak said in an interview. "That figure is not out of place for the kind of findings you see in Finland, Sweden and Norway, and other progressive countries. The two countries that really stick out are the U.K. and the U.S. where it's about a 40-per-cent advantage that gets transmitted across generations."

In the U.S, said Corak, you're much more likely to get stuck at the top, and much more likely to get stuck at the bottom.

Statscan has been studying the transfer of intergenerational income for about five years and Corak has produced several Canadian studies on the subject and has contributed a chapter to Generational Income Mobility in North America and Europe, a book soon to be published by Cambridge University Press.

Income mobility relates to access, inclusion and equality of opportunity, ethics that legitimize our public institutions and are central to Canada's innovation agenda, Corak explained.

"We imagine a new economy coming around the corner here -- one in which knowledge and skills are important -- and we want that economy to lift all boats," he said. "So we want to put in place a structure of institutions and will allow everybody to participate. What we're doing is documenting the extent to which our institutions lead to these inclusive outcomes."

Peter Hicks, senior policy adviser at Human Resources Development Canada, said the income mobility data is encouraging.

"This is a land of mobility and everybody has a fresh start in life, everybody has a good shake," he said. "Most people are in the centre."

"Obviously, this is not a time to throw away existing policies and arrangements," Hicks added. "That doesn't mean there aren't pockets of poverty. The average says your whole system isn't broken but that doesn't mean there aren't problems lying behind those averages that you've got to go out and start attacking."   - 2002 December 30  Vancouver Sun  by Harvey Enchin

HISTORICAL

New construction soars in Canada

Canadians will begin work on 225,700 homes this year, an unexpected gain from last year and the highest level of new construction since 1987, the government's housing agency says in its quarterly forecast.

The agency, Canada Mortgage and Housing Corp, had predicted in May that housing starts would drop to 208,500 units this year from a 15-year high of 218,400 last year. Mortgage rates had stayed near five-decade lows, underpinning demand, the agency said in issuing the revised numbers.

"Although rates have risen, they remain very low and together with solid employment and income gains will propel housing starts," Canada Mortgage and Housing's chief economist Bob Dugan said.

The Bank of Canada said in its latest policy report on July 22 that it was counting on domestic spending to power growth in the world's eighth-largest economy this year. Policymakers also increased their estimate for housing construction in the report, predicting it would account for 0.5 per cent of economic growth, up from 0.3 per cent in April.

The report covers single-family houses, flats and condominiums.

Canada's economy would expand 2.75 per cent this year, up from 1.7 per cent last year, the central bank said.

Canada's gross domestic product is about C$1.1 trillion (HK$6.53 trillion).

The pace of construction would cool next year as mortgage rates continued to rise, dropping housing starts to 204,200 units, Canada Mortgage and Housing said.

Existing home sales would increase 5.1 per cent to 457,000 this year, and fall to 433,100 units next year, the agency said. Canadians would continue spending more on renovations: C$36.3 billion this year, a 9.1 per cent gain from the previous year; and $38.5 billion next year, a 6 per cent increase.   -    2004 August 11  BLOOMBERG  

Housing boom across Canada seen as bright spot in the economy

Jacqueline - a single, 30-something professional based in Toronto - has been looking fruitlessly for a house for the past six months.

"House-hunting is a place where dreams and pocketbooks collide. I have become keenly aware of what I can afford, and it's not much," she said. "I am asking for a nice small starter home in the city. With my expectations in check, generally I thought that this could be obtained in the early C$200,000 [HK$1.16 million] range. Not so. That was possible a year or too ago but no longer."

Welcome to Canada's housing boom. Across the country, and especially in big urban centres such as Toronto and Vancouver, the market is on fire.

Weary buyers talk of long hunts for affordable housing, and if they do find something they often lose out in bidding wars. In Toronto, real estate agents send around flyers offering "great deals" for homes above half a million dollars.

Most economists see only a slight cooling this year - largely because already low mortgage rates are likely to go lower yet.

That would be a good thing for the Canadian economy, though not necessarily for house hunters looking for a price break.

Housing has been the one bright spot in an economy looking increasingly troubled as the high Canadian dollar savages exports and consumers keep a closer eye on wallets, especially for cars.

"While that other closely watched element of household interest-sensitive demand - car sales - has stumbled, housing starts have held up well," said Avery Shenfeld at CIBC World Markets.

Last year Canadian cities issued C$50.8 billion in building permits, 7.5 per cent above the previous year's record, with more than half of the total going for new home construction. "The torrid demand for new housing drove construction intentions to their new peak," Statistics Canada said.

Data from Scotiabank shows prices of existing homes jumped nearly 10 per cent last year, with gains of 16 per cent in Montreal, 10 per cent in Edmonton and about 6 per cent in Calgary and Toronto.   -  2004 February 11 REUTERS 


According to the Chief Economist at CMHC's Market Analysis Centre. "Mortgage rates are near 50 year lows, keeping the carrying costs of mortgages down. This encourages move-up buying by existing homeowners and attracts renter households into the home ownership market. Year-to-date, actual starts have exceeded last year's level by 4.7%." The rate of urban multiple starts was up 16.2% to 105,500 units in August compared with 90,800 units in July. Nationally, year-to-date actual urban multiple starts increased 16.1% compared with the same period in 2002. Link: Canada Mortgage and Housing  

Sales productivity at specialty stores in Canadian malls dipped again in June 2003, the International Council of Shopping Centers (ICCS) stated in its monthly report. Total sales per sq. ft. hit an average of $37 in June for non-anchor stores, down 1.7% from a year earlier, the New York-based organization said in a report issued yesterday. Falling sales rather than more retail space were behind the decline in productivity.   Sales at the 99 malls included in the report totalled $739.1-million, also down 1.7%, while total square footage was flat at 19.9 million.     June was the fifth month in a row in which sales productivity dipped at Canadian malls. "Last year, it was one month up, one month down, but this year only January was up,"  - 2003  August 

According to a report from the Canadian Real Estate  Association, Canada's resale housing market turned in its best year in 2002, with average prices climbing to new annual highs and a record number of homes changing hands. A record 296,221 existing homes were sold last year in those markets, up 10.2% from the former record set in 2001. The average annual price for an existing home also hit a new level, increasing to $202,366, with most major centres experiencing gains. The Ottawa region experienced the greatest price increase last year, with the average price jumping more than 14% on the Ontario side and more than 15% on the Quebec side.  Price increases also were strong in Edmonton and Montreal, although Vancouver and Toronto still have the country's most expensive markets, with prices averaging $301,473 and $275,002 respectively last year -  2003  January 18

TAX

TAXATION OF CAPITAL GAINS
Capital gains are any profits earned from the sale of assets that are capital property (for example, property not held for resale).

If you buy shares, bonds, mortgages, or property and sell them at a profit, that is usually a capital gain.

For disposition,  half of the resulting capital gains are taxable in Canada.

Capital gains of up to $500,000 on certain private Canadian corporation shares and certain farm properties may be eligible for a lifetime cumulative exemption from tax. In addition, the gain on an investment of up to $2,000,000 in certain private Canadian corporations can be deferred if the proceeds are reinvested in another eligible corporation within a specified time. 

Banks told to Finance takeovers with new shares 

Canada's financial regulator has told companies they must finance any big takeovers by issuing new shares, making major acquisitions more difficult just as the country's banks are at the height of their international prowess.

Issuing equity in a big deal would risk angering shareholders because their stock would be so diluted. At the same time, the banks find themselves in a state of limbo as they await the outcome of negotiations among global regulators on standard minimum capital requirements.

The edict on financing takeovers through stock issues shows just how crucial the Office of the Superintendent of Financial Institutions, Canada's regulator, deems strong capital levels to be in the wake of the financial crisis. It also helps to explain why there have been no major deals in the sector despite the strong positions of Canada's banks compared with their global counterparts.

The country's banks now enjoy a stellar profile after the crisis that devastated their peers but the moves by global regulators to bolster capital levels have muddied the waters for acquisitions.

“At this time, in light of the uncertainty as to the overall regulatory requirements down the road, the picture for the entire industry as to acquisitions is less than clear, Canadian Imperial Bank of chief executive officer Gerry McCaughey said in a recent interview.

“Over all, I believe that there is an expectation that, if major acquisitions were engaged in, until international rules are clear, share issuance would play a key role,” Mr. McCaughey said.

OSFI did not issue a written notice of its edict, but has been quietly advising the banks and insurers of the requirement. OSFI has told the financial institutions it oversees that it expects them to “finance material acquisitions through new equity,” spokesman Rod Giles said. “This is primarily because capital requirements are subject to significant change.”

OSFI has also told banks and insurers it does not want them to increase dividends or reactivate share-buyback programs any time soon.

Analysts who cover the banks say they were not aware that the regulator had told the institutions to pay for deals with new equity, but it's likely the market would demand the same thing for any major deal because investors realize how important capital will be in the future.

“I think it's a prudent stance on behalf of the regulator given the uncertain macro-environment,” said Rob Wessel, managing partner at Hamilton Capital Partners. “That being said, those same uncertainties meant significant acquisitions were unlikely anyways.”

The Basel Committee, a global regulatory body, released proposed new rules in December that would increase capital requirements for banks and insurers. Discussion about the proposals will pick up this summer, and the standards are scheduled to be set at the end of this year but will not take effect until later.

The Financial Stability Board, an international group made up of central banks, government officials and regulators, has been warning since the fall that “banks should be retaining profits now to prepare to meet these future additional capital requirements. Restricting dividends, share buybacks and compensation rates is a necessary part of that process.”

But there is also an effective restriction on paying for big takeovers with cash or debt, and that is part of the reason Canadian institutions have not been very active when it comes to mergers and acquisitions, executives say.

In November, Manulife Financial Corp. CEO Don Guloien decided to bolster the insurer's capital levels by raising $2.5-billion in common equity, a controversial move he said would allow the company to take advantage of acquisition opportunities. The move drove down the insurer's stock price because of the dilution to existing shareholders.

Mr. Guloien was asked on a conference call with analysts in early February whether he would now fund potential deals with common equity rather than cash.

“For small- to medium-sized deals that diversify our base of business, we feel that we have the right firepower,” he said, implying that they could do it with financial resources they have on hand. “For very large deals, we have to think of other things.”

The key measure of banks' capital levels, called the Tier 1 ratio, compares the amount of capital they hold with their assets (or loans), which are weighted depending on their degree of risk. OSFI currently requires banks to maintain a Tier 1 ratio of at least 7 per cent, but all of the country's major lenders far exceed that minimum requirement.

UBS analyst Peter Rozenberg has estimated Canadian banks would have about $40-billion in excess capital in 2012 over and above a Tier 1 ratio of 10 per cent.

“The Canadian banks overall are well positioned for the expected changes in regulatory capital requirements that are being discussed on a worldwide basis,” CIBC's Mr. McCaughey said.

“However, we do not yet know what the conclusions of those international discussions will be and how they will apply to the Canadian jurisdiction.”

In the meantime, financial institutions here are displaying an abundance of caution.    - 2010 March 1    GLOBE & MAIL

Other Canadian property news archived:


Copyright ©  2012
By opening this page you accept our
Privacy and Terms & Conditions