Posted by: Daryl & Wendy Ashby | December 21, 2012

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As 2012 draws to a close, industry experts are formulating predictions for the property market in 2013. So what will happen to cap rates?

The simple and resounding answer seems to be, not too much.

While analysing rates on a national basis is difficult, the general feeling among investors and analysts is that rates will remain relatively low across Canada.

A report presented by the Urban Land Institute and PwC, Emerging Trends in Real Estate 2013, reveals that the lowest cap rates can be found in commercial and multi-residential sectors.

“Survey respondents expect little further downward movement in ‘low-as-you-can-go’ cap rates, especially for apartments, regional malls and downtown office space. The exceptions will be for prime development sites in and around downtowns, especially for stores,” the report said.

But are low cap rates necessarily a good thing? The capitalization rate is determined when the net operating income (NOI) is divided by the purchase price, or current value, of the asset.

For investors concerned with monthly rental income, a higher cap rate – signalling lower operating costs and thus higher cash flow – is desirable. But low cap rates signal the value of the acquisition has risen, allowing money to be made when selling the asset.

Given the current, most investors are focused on maximizing the cash flow today and not necessarily on upping property values when buyers are fewer and farther in between.

“With prices stabilizing and buyers having a more difficult time buying properties that puts more demand on rentals, which increases rental rates in key neighbourhoods and key markets,” says investor Paul Hecht. “I would say Toronto is neighbourhood driven; we have over four million people here, it’s like putting Calgary, Edmonton, Victoria and Ottawa all in one city. There will be pockets which won’t do anything, and there will be pockets that perform very well.”

Still, many investors feel that lower cap rates will yield the biggest returns.

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