Killam Properties Inc. will go on a Canada-wide apartment buying spree after striking a $450-million partnership with one of the largest Islamic banks in the Middle East.
Kuwait Financial House has been looking to invest in Canadian real estate for at least five years, ultimately deciding to invest in the relatively stable, cash-generating apartment sector through the partnership with Halifax-based Killam and Sigma Real Estate Advisors. The deal will effectively double the number of buildings owned and managed by Killam.
The commercial real estate industry has anticipated an influx of Middle Eastern investors for several years, said Michael Smith, managing director of real estate equity research at Macquarie Securities Group in Toronto. But this is the first time a bank has stepped in with a firm cash commitment, he said, and it likely won't be the last.
"This isn't only significant from a real estate standpoint, but it's significant for Canada because these Middle Eastern funds take years to do their research and get comfortable with a market," Mr. Smith said. "Once they get in, they tend to stay in and that opens the door to other regional players to come over as well."
The Kuwaitis were attracted to Canadian apartment buildings because they are considered steady and predictable sources of income, said Sigma's executive chairman Lou Maroun.
Considered to be defensive real estate holdings, the deal is being viewed as a way to acclimatize the bank to Canada without taking on a lot of risk. As an Islamic bank, Kuwait Financial is bound by sharia law and is not allowed to invest in certain sectors. Apartment buildings, Mr. Maroun said, were seen as an easy fit.
"They tend to focus on certain asset classes such as real estate," he said. "They are much like any of our ethical funds, it's very simple - they don't invest in things that have a sin factor associated with them."
Mideast banks were hit hard during the global recession, and are only now cautiously deploying their money abroad.
"Now that they are back in the game they want to go for very safe properties and Canada fits that profile," Mr. Maroun said. "Ultimately, they plan to look at [Canadian]retirement complexes, assisted living facilities and industrial warehousing."
A spokesman for the bank said it would consider investing as much as $750-million in Canada over the next several years.
"We are very pleased to be making our first investment in the Canadian real estate sector," Abdul Naser A. Al-Subaih, assistant general manager of the bank's investment arm, said in a statement yesterday. "We believe the Canadian market offers exceptional value, and we intend to make further investments in the country."
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How it started
The deal's origins go back to 2006, when Lou Maroun sold Summit REIT and started Sigma Real Estate Advisors. He had been talking to Kuwait Financial casually before the sale, but once retired he decided to spend more time courting the financiers. When they finally decided to partner on a deal, he looked to Killam because of its strong presence in Eastern Canada and its ambitions to expand deeper into Ontario.