Listen to real estate investors these days and you may hear tales of woe. Not about losses. The problem is the shortage of solid Canadian real estate investment properties at prices and cap rates that real estate investors consider ideal for satisfying their thirst for yield, or return on investment.

Cap rate, or capitalization rate, is an investment criteria for projecting returns. The formula is descriptively simple: Cap Rate = Net Operating Income (NOI) / Capital Cost or purchase price

Successfully applying this concept to your situation, relative to real estate market patterns—current and projected—is not so simple. For instance, an income-producing property with an NOI of $100,000 and a purchase price of $1,000,000 has a cap rate of ($100,000/$1,000,000) 10%. Investors decide on the best cap rate to achieve their goals, and then search for a property to meet their investment criteria—often in vain. Locating an available property with a high cap rate, at the desired investment level, is the challenge.

The recent, by-invitation-only CIBC 16th Annual North American Real Estate Equities Conference demonstrated how apparently-simple investment concepts play out in complex, ever-changing real estate markets. Leading North American real estate experts shared experiences and quips on property and capital market topics. Many commented that there is more 2011 money searching for income property than there is product to buy.

Paul Farrell, Managing Director and Group Head, Real Estate Investment Banking, CIBC World Markets Inc., framed the Conference focus by stressing that 2010 was almost a record-breaking year: "You have to go back to 1997 to find another year where more public real estate equity was raised than last year. Real estate equity totalled CDN$4.8 billion, and accounted for 12% of all public equity issue raised in Canada...up from last year's [2009] 5%....With equity trading at a premium to net asset value, issuers were happy to issue treasury stock to fuel growth, and investors—both retail and institutional—were happy to buy, satisfying their need for yield."

What lies ahead in 2011?

• Projections from many panelists stated that real estate values will go up mildly as economies soften. Chief Economist Avery Shenfeld, also Managing Director, CIBC World Markets Inc., forecast Canadian economic growth slightly under the 3% of 2010 as the world economy slows to just over 4%. Shenfeld felts the pattern of big spikes in oil prices being followed by recessions will not be repeated with the current oil price rise.

• Shenfeld forecasts little government action on either side of the border to deliberately aim at slowing economic growth. Nor does the near future hold a "big inflation outbreak" or dramatic reversal of unemployment levels.

• Don't look for buoyed interest rates either. Shenfeld projects a "slow process of rising rates to about overnight at 2% by end of year," and then a pause. Rising oil prices will not drive interest rates with them.

• E.M. Blake Hutcheson, President & Chief Executive Officer, Oxford Properties Group, injected the voice of experience: "Don't think you have to get off-point if your investment strategies do not dove tail with the market." In this low interest environment, renovating and upgrading existing investment holdings can make more financial sense that jumping into bidding wars that drive you off target.Ed Sonshine, President & Chief Executive Officer, RioCan Real Estate Investment Trust, explained that high-quality urban assets like RioCan's Yorkdale Mall increase investment returns through continued intensification. The potential for appreciation and improved returns should be factored into buying decisions for all types of real estate.

If you are considering investment in real estate, tackle non-deductible debt first to increase borrowing power and save money. Although Canadians patted themselves on the back for having lower credit card debt than the US, there'll be trouble if borrowing continues unchecked. Shenfeld said debt is now about 7% of income, but project 5 years into the future, with a higher overnight bank rate, and, at the same pace of debt growth, 13% of income could be eaten by interest rates.

Farrell stressed the value of "gut instinct and experience" in building profit. If you're new at real estate investment—or home ownership—make sure you find proven professional gut instinct and experience to rely on until your own evolves.

Published: April 19, 2011

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Futurist and Strategist PJ Wade is "The Catalyst" - intent on "Challenging The Best to Become Even Better." PJ earned this title by translating the dynamic impact of Boomers and their multi-generation families into relevant insights that start people thinking and taking action—in business and in life. Author of 8 books and more than 1800 published articles, PJ encourages individuals to become their own futurist. PJ writes and speaks about the insight, knowledge and solid decision-making skills that professionals and their clients need to live and work in this vortex of change. For instance, since PJ knows that home is headquarters for the new decades-long "unretirement," she wrote the popular book "Reverse Mortgages: Best Friend, Worst Enemy...Your Choice!", which is filled with suggestions and cautions on protecting, building and managing home equity. Her new business book, "What's Your Point?: Cut The Crap, Hit The Mark & Stick!" will be published in 2012. As The Catalyst, PJ provides strategic communication, client appreciation and advanced education services to the financial, tourism, lifestyle and service sectors - and the clients they serve. A frequently-quoted financial and business commentator, PJ is a thought-provoking strategic speaker who offers practical, real-life suggestions on leaving "the box" behind and embracing Forward Thinking - a talent she regularly demonstrates in this column. For more on keynotes, blogs, books and information on a range of 21st-Century topics, visit TheCatalyst.com.