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U.S. firm finds reliable road to Canada

LaSalle Investment returns with $309.5-million war chest amassed from domestic investors

Special to The Globe and Mail

Despite intense competition for any available deal, foreign investors continue to be drawn to Canada. The future may not offer the 20-per-cent-plus annual returns enjoyed in the early years of this decade, but the prospects of a healthy 8 to 10 per cent a year in a stable, steadily growing economy is enough to draw investors from Germany, Israel and the United States in land rush numbers.

This year, investments in all forms of real estate by nationals and foreign interests alike hit the $23-billion mark, up from $19.7-billion in 2005, according to CB Richard Ellis Ltd., a national real estate broker. Next year promises to top even that record-breaking mark, it predicts.

German and Israeli investors continue to lead the chase for Canadian real estate, along with U.S. investors. While most German and Israeli investments have either been direct or through new forms of open- and closed-end funds, complicated tax laws dictate that U.S. interests take a novel route to cashing in on Canada.

One is by organizing funds with the units sold to Canadians while the U.S. company acts as general partner collecting management and performance fees as well as holding a minority position.

"As opportunities at home dry up, they naturally look north to us," says Blake Hutcheson, president of CB Richard Ellis. "In many U.S. markets, there has been overbuilding. There are also regional economic challenges.

"Canada may be a smaller market, but it continues to offer great possibilities for attractive returns in a stable market."

One of the most recent is the international, Chicago-based giant Jones Lang LaSalle, the only real estate, money management and services firm to be included in the Forbes Platinum 400.

Last month, the Canadian arm, LaSalle Investment Management, announced it had attracted $309.5-million to its Canadian Income and Growth II funds, all of it aimed at picking up three-quarters of a billion dollars in industrial, office, retail and multifamily properties.

It is LaSalle's second foray into Canadian real estate. The Growth I Fund closed in 2003 after raising $268-million from Canadian institutional investors. It has performed spectacularly, returning more than 20 per cent a year to investors.

Zelick Altman, LaSalle's Canadian managing director, says he does not expect the Growth II Fund to perform at those dazzling levels. Still, he suggests returns at levels in excess of 10 per cent a year.

"The market is highly competitive now. It is more difficult to find opportunities," he says. "Our forte is value creation, which means we only buy where there is an opportunity for us to increase the performance of an asset by a measure we feel is acceptable to our investors.

"If you want to buy just for the sake of buying, then I can think of two office buildings along the Yonge Street subway line [in Toronto] we could pick up tomorrow for $200-million each. That is not what we do, however."

With its previous fund, what LaSalle did with a remarkable combination of luck and foresight was catch the bull market in almost all forms of real estate, especially the Alberta energy boom in its early stages.

It bought and then disposed of for a profit an Edmonton office building, industrial properties in Montreal, an entire portfolio of office buildings near Toronto's Pearson airport, office buildings in Vancouver and Calgary and a variety of retail shopping malls.

The result was a healthy level of investor returns, which quickly gave LaSalle a golden name among institutions.

"What LaSalle had going for it originally was a terrific international reputation," Mr. Hutcheson says. "The real story is just how huge they are globally."

The parent company, Jones Lang LaSalle, manages a portfolio of 966 million square feet in 50 countries worldwide and has $39.5-billion (U.S.) worth of assets under management.

"We are based in Chicago, just across the lake, so it was only natural that we started looking at establishing operations here [in Canada] six years ago," Mr. Altman says.

After all, LaSalle had a sterling track record and finding institutional clients was simply a matter of looking them up in various public records and then knocking on doors.

While in the past LaSalle has targeted small to medium-sized pension funds, insurance companies and university endowment funds, the latest offering also includes both a family trust and one wealthy individual, none of whom Mr. Altman will identify. What he will say is that there are 17 investors and each anted up about $20-million.

"What we do is work with each of them to see what their needs and expectations are and then create an offering that matches those needs," he says.

The family trust and the individual investor were both referred by previous institutional clients who were impressed by LaSalle's performance on their behalf.

"LaSalle competes with us in some markets," says Paul Finkbeiner, president of the giant GWL Realty Advisers Inc. of Toronto. "A second fund comes as no surprise; there is still tremendous interest in Canadian real estate among institutional investors even with returns in the more modest 8-per-cent to 10-per-cent range."

Granted, the second fund faces very different investing circumstances than the first, Mr. Altman says.

Competition for deals is intense. Giants, such as Oxford Properties Group, have moved into a more balanced approach to wealth creation from being mainly long-term investors letting time do the heavy lifting.

That new strategy includes both development of new properties and searching out existing properties with an opportunity to create value through reformatting, refurbishing and raising rents.

"There is no longer as much upside in the West," he says. "This past year, there have been situations where rents rose in some buildings at about $1 a month [a square foot]. There are two aspects we look at: The first is the price we buy at and the second is our ability to improve an asset's performance.

"There may not be as many opportunities as in 2003 but, over the long term, we are looking at strong markets in all sectors and in almost all major markets."

Besides, time is on LaSalle's side. The fund, which closed this fall, has until Oct. 31, 2013, to dispose of any assets it acquires.

© 2007 The Globe and Mail. All rights reserved.

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