Kingsett Capital is looking to invest $2.5 billion in what it deems “mispriced” Canadian office and retail real estate sectors.

“We’re in a spot where, in my view, the risk has been mispriced in office and retail in Canada,” Rob Kumer, Kingsett’s new CEO, told Bloomberg. “I like the idea today of buying assets that are high cash flow.”

Office property valuations have declined due to high interest rates and the remote-work trends, while retail asset values have felt the effects of the COVID-19 pandemic that severely reduced mall traffic, as well as disruptions caused by increased e-commerce. But Kumer told Bloomberg that Canadian office and retail investors are insulated from distress situations that have hampered lenders from Japan to New York.

In Canada, he explained, many commercial mortgages are recourse loans that allow lenders to seize and sell an owner’s other assets if the value of a mortgaged property falls below the debt owed.

“There’s going to be some pressure on valuation metrics and we’re going to have to sort it out,” Kumer told Bloomberg. “But because Canada is more conservatively levered, it’s more institutionally held, it’s all recourse — I think these things will drive a much more stable market and landlords will be able to sort themselves out.”

The angst over office values overlooks the healthy income that the assets are generating, and malls are still performing well, he added.

“The core of real estate investing is cash flow and that’s where I’m focused today because the capital appreciation, I don’t know where it’s going,” he told Bloomberg. 

Kumer expects more office and retail assets to be put up for sale this year, but owners are still reluctant to sell, he noted. He indicated that Toronto-based Kingsett has been unable to reduce the bid-ask gap while pursuing deals.

“The right value is where sides come together and agree on price, and we haven’t quite found that yet,” he told Bloomberg.

Kumer, a longtime Kingsett executive, became CEO in January as the company’s legendary majority owner Jon Love took on the role of executive chair.

Image: BDP Quadrangle