Canadian Institutional Commercial Debt Market Report October Canadian Institutional Commercial Debt Market Report. Second Quarter 2009

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1 Canadian Institutional Commercial Debt Market Report Second Quarter 2009

2 About REALpac REALpac, the Real Property Association of Canada, is Canada s senior national real property association whose mission is to bring together the country s real property investment leaders to collectively influence public policy, to educate government and the public, and to ensure stable and beneficial real estate capital and property markets in Canada. REALpac members currently own in excess of CDN $150 Billion in real estate assets located in the major centres across Canada and include real estate investment trusts (REITs), publicly traded and large private companies, banks, brokerages, crown corporations, investment dealers, life companies, and pension funds. Visit REALpac at Released October 16, 2009 Please direct any questions or comments to: Carolyn Lane Vice President, Research & Communications T.: x.223 E.: clane@realpac.ca Real Property Association of Canada One University Avenue Suite 1410 Toronto, Ontario M5J 2P1 Canada F.: W.: The information that may be contained herein has been compiled by REALpac from sources believed to be reliable, but no representation or warranty, express or implied, is made by REALpac, its directors, officers and staff or any other person as to its accuracy, completeness, or correctness. Opinions, estimates, conclusions, or other information expressed or contained herein constitute REALpac's judgment as of the publication date, are subject to change without notice and are provided in good faith but without representation or warranty as aforesaid. REALpac and its directors, officers, and staff, assume no liability for damage or loss arising from the use of information contained herein. REALpac is not providing investment, legal or tax advice. Readers are urged to consult their own professional advisors for further confirmation and further information. 2

3 Introduction It has been a challenge to determine the size of the overall Canadian institutional commercial real property debt market. However, it is important for REALpac Members to have an understanding of the market to help both lenders and borrowers gain an appreciation for the total magnitude and range of commercial debt in Canada. Lenders may also wish to understand their own share of that market. Moving forward out of the economic downturn, a clearer picture of the entire debt market will also allow lending organizations to discern which entities are more active, which are less active and which direction the market is headed. REALpac has researched the known debt market and that research is presented in this report. REALpac plans to track trends and changes as they happen over time. Methodology There are a number of approaches that can be taken to determine the approximate size or value for the Canadian debt market. This report, in its effort to present the most reliable, accurate, and conservative estimates, has focused on data provided by the Bank of Canada. The Bank of Canada compiles data from the Statistics Canada CANSIM database, Canada Mortgage and Housing Corporation, Computershare Trust Company of Canada, and Dominion Bond Rating Service into a monthly Banking and Financial Statistics report. 1 This report states nation-wide selected credit measures including monthly average values for non-residential mortgages. The Bank of Canada defines non-residential mortgages as all mortgages not classified as residential, such as those on hotels, stores, office buildings, garages, theatres, warehouses, industrial plants, institutional properties, farms, and vacant land. 2 As a result, the data overshoots what the Canadian commercial real estate industry may regard as commercial mortgages. These types of mortgages, as a whole, comprise the known institutional commercial real property market, and data recorded for these types of mortgages was used as a best estimate of the base/minimum value for the known commercial debt market. At present, we are not aware of more detailed or more reliable sources of data for these debt market segments on an aggregated basis. The other part of the debt market that must be taken into account is the Commercial Mortgage-Backed Securities (CMBS) market. This portion of the total debt is often recorded off-book in financial institutions and is a material contributor to the total debt value available for commercial investing. Research and calculations leading to an estimate of the total value of Canadian CMBS were taken from REALpac s recent report, CMBS Maturities Update, and the Monthly CMBS Securitization Report, June 2009 from DBRS. 4 The estimated amount of CMBS is added to the value of the known commercial debt in Canada, thus resulting in the total known institutional commercial debt outstanding. 1 Bank of Canada, Banking and Financial Statistics - June 2009, tables E1 and E2,( Ottawa: Bank of Canada, 2009), from 100/201/301/bank_can_banking_fin_stats-ef/2009/index.html, accessed September Bank of Canada, Banking and Financial Statistics - June 2009 ( Ottawa: Bank of Canada, 2009), S132, from accessed September REALpac, CMBS Maturities Update (Toronto: REALpac., 2009), from CMBSMaturitiesUpdate2009_Final_16Sept09.pdf, accessed September DBRS, Monthly CMBS Securitization Report - June 2009, from DBRS: quick?query=cmbs Surveillance report, accessed September

4 The final piece of the commercial mortgage data set is the private lending market. Unfortunately, there is no comprehensive, published data available to include in this report at this time. Data and Analysis As a monthly average 5 for June 2009, the Bank of Canada reported the value of commercial mortgages (non-residential) to be $81.383B CAD and divided the debt into groups based on source; namely, chartered banks, trust and mortgage loan companies, credit unions and caisses populaires, life insurance companies, and non-depository credit intermediaries and other institutions. Chart 1 shows the most recent monthly average values (i.e., June 2009) according to the Bank of Canada s Banking and Financial Statistics report, released in September Chart 1: Size of the Canadian Public Debt Market in Billions of CAD, June Source: Bank of Canada Banking and Financial Statistics, September 2009, Statistical Table E2 Selected credit measures. This data excludes CMBS and private lending. If the total level of debt is reviewed over time, as reported by the Bank of Canada, a nearly constant trend upwards can be seen thus indicating that overall, lenders have been increasing the capital available for 5 Under the Bank Act, the banks in Canada are required to submit reports on their operations, including principle banking statistics, to the Office of the Superintendent of Financial Institutions and the Bank of Canada. Data for the chartered banks relate to monthly average of days, and data for the non-bank financial institutions are shown on an average of month-end basis. For notes on the calculation method used for each institutional category, refer to Banking and Financial Statistics, September 2009 from the Bank of Canada, S128-S132 and S139-S144, from 4

5 commercial real property investments rather than closing off the available capital. Chart 2 shows the monthly average value of non-residential mortgage debt held by Canadian institutions from November 2003 through June Chart 2: Total Canadian Commercial Mortgage Data from November 2003 to June 2009 Source: Bank of Canada Banking and Financial Statistics, September 2009, Statistical Table E2 Selected credit measures. This data excludes CMBS and private lending. The chart shows that there has been a steady increase in the total amount of commercial mortgage debt outstanding, even though there has been turmoil in global markets and a credit crunch over the past year. Taken as a whole, the total amount of debt has increased 42.4% since January of 2004, from $57.208B CAD to $81.383B CAD. More recently, the debt grew at a slower rate, namely 7.9% since January 2008 and 0.47% since January The plateau seen in the debt market mirrors the general trend in the financial markets but is less severe than would have been expected given the credit crisis that has been experienced around the world in the past year. Chart 3 illustrates the various sources of capital in Canada (again, excluding CMBS and private lenders) and the differences between the amount of non-residential mortgage lending by these institutions over time. 5

6 Chart 3: Size of the Canadian Commercial Mortgage Market by Source from November 2003 to June Source: Bank of Canada Banking and Financial Statistics, September 2009, Statistical Table E2 Selected credit measures. This data excludes CMBS and private lending. Chart 3 indicates that there has been little growth in insurance lending in Canada in the past five years. January 2004 records show total insurance company non-residential mortgage credits at $25.872B CAD, increasing by 12.3% to $29.065B CAD in June However, lending by chartered banks has increased considerably from $17.36B CAD in 2004 to over $25B CAD in 2009, a 45.3% increase. Credit union lending has also increased a significant 56.5%, from $12.026B CAD to $21.279B CAD. Although trust and loan companies as well as non-deposit intermediaries have smaller total amounts of non-residential mortgage credit on their balance sheets, the increase in the past five years from $0.572B CAD to $2.526B CAD and $1.371B CAD to $3.284B CAD, respectively, is calculated to be a dramatic 441% increase for the trust and loan companies and a 239% increase for the non-deposit intermediaries. 6

7 The other component of the Canadian commercial debt market examined in this report is the CMBS market. According to the recent CMBS Maturities Update, published in September 2009 by REALpac, the maturing balance of underlying CMBS loans is approximately $1B CAD per year for 2009 through 2011 and increases to $1.6B CAD in The total CMBS default average is 33/100 th of one percent in Canada, according to DBRS s Monthly CMBS Surveillance Report, with a total outstanding balance of $17.253B CAD at the end of June Note that one transaction in Canada is responsible for much of the default rate and without this transaction, the rate would fall to 0.16%. With the addition of Canadian CMBS data, the known size of the Canadian commercial mortgage market increases to $98.636B CAD, excluding the private market. Chart 4 illustrates the proportion of total known debt that is held by each of the sources mentioned above. Chart 4: Total Known Commercial Mortgage Debt Outstanding, June REALpac, CMBS Maturities Update (Toronto: REALpac., 2009), from CMBSMaturitiesUpdate2009_Final_16Sept09.pdf, accessed September DBRS, Monthly CMBS Securitization Report - June 2009, from DBRS: quick?query=cmbs Surveillance report; accessed September

8 Limitations There are many limitations to the estimated values presented in this report as they were difficult to determine in an exact manner. First, a single resource for all commercial mortgage data does not exist in the Canadian marketplace. The data used in this report was compiled by the Bank of Canada from the Statistics Canada CANSIM database (a socio-economic database) which is updated regularly upon release of public information from the institutions and corporations. Most of the institutions such as credit unions and mortgage lenders have their credit measures updated on a monthly basis while the chartered banks release data on a weekly basis. To keep the data comparable, monthly averages for all sources were used and the most up-to-date (revised) value was included in the analysis presented herein. Second, the Bank of Canada data does not include lending and mortgage activity data from the private sector and debt that has been resold (i.e., CMBS) and an estimation of this value proves to be variable depending on the source or methodology. REALpac has made a number of inquiries into the amount of debt that exists in the private lending sector, but it is unlikely any response will be forthcoming with comprehensive data. Finally, extrapolation from US data using the 10 to 1 rule (i.e., US GDP is 10 times that of Canada, the US population is 10 times that of Canada) proves not to be applicable for estimating the size of the Canadian commercial debt market. According the US Mortgage Bankers Association s analysis of Federal Reserve Flow of Funds data, the size of the commercial/multifamily US mortgage market is estimated to be $3.47 Trillion USD, including $714B USD in CMBS, CDO (collateralized debt obligation), and ABS (asset-backed security) issues. 8 Thus, the size of the US debt market is $2.76 Trillion USD, excluding CMBS, CDO, and ABS issues. This value may be artificially high due to the US banks including commercial and industrial loans to which a piece of commercial property has been pledged as collateral. Assuming the Canadian market is one-tenth of the US market, this would suggest the total value of the known Canadian debt market should be $276B (or equivalent in CAD). Even though this estimate does not take into account CMBS or private lending, nor does it include adjustments for currency fluctuations or differing market conditions between countries, the disparity between the conservative values put forth above. The value from extrapolation seems too great to conclude that the 10 to 1 rule is applicable in this case. Conclusion In general, there is a lack of extensive information on the total size of the institutional commercial real estate debt market in Canada. The Bank of Canada is one of the few sources of comprehensive information but the data collected does not include the private mortgage market or commercial mortgage-backed securitized debt. The trend from available Bank of Canada data indicates that the overall amount of traditional commercial mortgage lending for commercial real estate has increased in recent years. As shown in the previous charts, the total known institutional commercial mortgage lending has increased from approximately $57B CAD in early 2004 to just over $81B CAD at the end of the second quarter of Mortgage Bankers Association, Commercial/Multifamily Mortgage Debt Outstanding - Second Quarter 2009, from MBA: accessed September

9 Additional References Bank of Canada. (2009, June). Banking and Financial Statistics - June Retrieved September 2009, from Bank of Canada: 100/201/301/bank_can_banking_fin_stats-ef/ 2009/index.html Bank of Canada. (2009, September). Banking and Financial Statistics - September Retrieved September 2009, from Bank of Canada: 100/201/301/ bank_can_banking_fin_stats-ef/2009/index.html Commercial Real Estate Direct. (2009, July 14). Moody's Sees Delinquency Rate for its CMBS Universe at 5-6% by Year-End. Retrieved July 2009, from Commercial RealEstate Direct.com: DBRS. (2009b, September 10). Monthly CMBS Securitization Report - August Retrieved September 30, 2009, from DBRS: DBRS. (2009a, July 8). Monthly CMBS Securitization Report - June Retrieved September 2009, from DBRS: Surveillance report Mortgage Bankers Association. (2009b, September). Commercial Real Estate/Multifamily Finance Quarterly Data Book - Q Retrieved September 30, 2009, from MBA: Mortgage Bankers Association. (2009a, September). Commercial/Multifamily Mortgage Debt Outstanding - Second Quarter Retrieved September 2009, from MBA: Real Property Association of Canada. (2009, September 17). CMBS Maturities Update , from CMBSMaturitiesUpdate2009_Final_16Sept09.pdf 9

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