“Over the 14 years that Allied has operated, that intensification, that urbanization trend has deepened,” Allied president and CEO Michael Emory said at the recent RealREIT conference in Toronto.
Intensification of existing properties means “you have no effective land costs. If you can do that in a meaningful way, the returns on capital can be attractive,” Emory added.
For Allied, that means adding 250,000 to 300,000 square feet at a time versus adding a million or more, “which is much more manageable and the risk associated with that is much easier to contain.”
That strategy also allows Allied to take on many more develops at a time, spreading the financial and operational risk rather than betting on one or two massive developments at any one time. Emory noted Allied has a 15 per cent limit on the amount of book value that can be allocated to development.
“That is a self-imposed limitation and it is one that I think makes a great deal of sense for a REIT generally.”
Allied is currently running between six to eight per cent of its book value in terms of development costs, Emory added.
Property Biz Canada articles about RealREIT
In other RealREIT news . . .
• Allied’s Emory, in response to a panel question on the near future of M&A, said: “M&A is always topical, always boring to me, frankly. There is no public entity out there that has anything that we want at all.”
• Emory agreed with the opinion of Michael Smith, managing director of global research at RBC Capital Markets, that the new generation of REITs may present acquisition opportunities for more established players.
• CAPREIT (CAR.UN-T) president and CEO Tom Schwartz said the biggest opportunity for his outfit is the availability of low-cost financing. “We are getting money today, 10-year money, at 2.3, 2.4%. That is incredibly compelling and again it is very much driving our business.”
• “We are still buying at significantly below replacement cost,” Schwartz added. “This is going to be a great acquisition year for us. We are making acquisitions again 50% or more below replacement cost in markets with high barriers to entry and irreplaceable locations.
• Schwartz also pointed to one unidentified risk: overbuilding at the top end of the rental market.
“Everybody is addressing the exact same segment of the market which is the top. . . . Affordable rental demand is absolutely insatiable. But as you move up the chain and you get into more expensive rental, that’s rental by choice.
“I think that there is a risk that segment of the market will get severely overbuilt. I think people will get hurt . . . “