RioCan’s $2B sale raises questions about future of retail properties: report
Diversification into residential sector called a ‘more drastic change’ in focus
TORONTO A report from real estate company Colliers International questions whether the decision by RioCan Real Estate Investment Trust to dispose of up to $2 billion of its property portfolio could signal a shift away from retail assets.
Toronto-based RioCan said Monday it is accelerating its plan to focus on six core markets in which there is more opportunity for growth and will sell off up to 100 properties. Chief executive Ed Sonshine said rent growth in some of the secondary markets is just too low.
“If guidance for the future for retail in Canada is to be taken from this change in direction for RioCan, it may be that retail as an asset class is a questionable focus, given RioCan’s move toward a more diversified portfolio that will include residential,” Craig Hennigar, director of market intelligence in Canada for Colliers International, said in the confidential report.
“There is no doubt that RioCan will remain the largest REIT in Canada, and will still have a predominantly retail-oriented portfolio, but this move combined with a planned repurchase of 19.2 per cent of the outstanding units would seem to indicate a more drastic change in long-term focus than noted in the past.”
RioCan is expecting net proceeds of $1.5 billion from the sale and while some of the money is being used to cancel its own shares, the company plans to spend $300 million to $400 million annually on the REIT’s development pipeline. It is also cancelling RioCan’s dividend reinvestment program.
“This type of stock repurchase strategy is a clear move toward a hawkish view of the retail market in general; whereby RioCan is narrowing its ownership strategy to key assets in key markets,” said Hennigar, noting the planned sale is a reduction of one-third of the company’s portfolio of 299 assets.
The RioCan plan is to focus on transit oriented development opportunities and intensify its existing portfolio which includes the diversification into the residential sector.
“In essence, RioCan is moving away from retail as a focus and is now looking to become entrenched in the type of live/work/play lifestyle centres that have been topical over the past number of years; not least of which because of the potential headwinds that retail may face, and the common expectation that millennials will be likely to rent accommodation in such locations,” the report states.
The strategy has been fuelled by strong housing demand, high prices and traffic congestion but one key consideration, said Hennigar, is whether these locations need to be downtown or can they sprout up anywhere.
The report points out the increase in population in downtown Toronto was 24.3 per cent from 2011 to 2016, driving 42,860 more residents to these areas. By comparison, Hennigar points out that over the same period of time population growth in the entire GTA was 344,976. Downtown central areas ultimately contributed 12.4
This type of stock repurchase strategy is a clear move towards a hawkish view of the retail market in general.
per cent of all growth.
“These statistics may call into question the validity of a singular view of the future for growth in metropolitan areas,” said Hennigar. “However, in the case of RioCan, the company is concentrating on holdings in only the six largest markets in Canada, where the growth in the downtown core areas of these markets averages 7.4 per cent, or 79,127 of the total population growth in these cities of 988,992 over the period 2011 to 2016.”
The report concludes that while online retailers have made “inroads in the retail landscape” the penetration has not had any material impact in many cases.
“It is reasonable to think that the assets that RioCan will be selling are well tenanted properties in secondary markets; the type of assets that will draw a higher yield than those in the largest markets in Canada,” said Hennigar, noting there will be temptation to buy those properties because of the high return.
“The question is: will the retail market get as bad as some pundits may suggest, or are we at the point of maximum pessimism on the backs of the Sears and Toys R Us receivership announcements?”