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The country's second-tallest skyscraper is poised to go on the auction block, and Canada's commercial property market is so hot that the Toronto tower may fetch a $1 billion price, shattering the previous record for an office complex.
Bank of Nova Scotia is looking into selling its iconic red headquarters in downtown Toronto, the 68-storey Scotia Plaza. The bank is at an early stage of exploring the idea, spokeswoman Ann DeRabbie confirmed.
Just as home prices are setting records, the values of high-quality downtown buildings in Canadian cities are jumping. A solid economy is keeping the best buildings full, and the same low interest rates that are driving home prices higher are helping property investors pay top dollar for office towers in prime locations.
If Scotia Plaza attracts a $1-billion offer, as some senior real estate sources believe it will, the deal would eclipse the previous record for a single office complex by about $400 million. Sources said the most likely buyer is a pension fund, which would be able to afford the huge price tag and shoulder the debt that would be required.
Scotia Plaza's tower, completed in 1988, is a postmodern landmark in Toronto's core. The red granite spire stands beside the corner of King and Bay Streets, in the heart of the city's financial district, and is one of the most sought-after business addresses in the country. Bank of Nova Scotia occupies about two dozen floors in the building.
"It's marquee - as marquee as they come," said John Andrew, commercial real estate professor at Queen's University. "There's no question there would be a huge amount of interest."
Record-low interest rates may bring in a broad array of potential buyers, Andrew said.
"I've been hearing a lot of rumblings that maybe we've been on a good run and it can't possibly go on that much longer," he said. "I think it's a little early for that kind of talk, but you could see why the bank would want to get out there while rates are low."
Scotiabank is the last of the large Canadian banks to own its headquarters - a throwback to a bygone era in banking. Other banks sold their towers to property firms to raise cash many years ago.
Royal Bank of Canada sold its head office and portfolio of more than 30 buildings in the late 1990s. In 2000, Canadian Imperial Bank of Commerce sold its Commerce Court complex of four buildings, including a tower right across the street from Scotia Plaza, for $618 million. That's the current record for a single sale of an office complex in Canada.
Scotiabank held on, viewing Scotia Plaza as the equivalent of a rainy day fund. Now, with the city's commercial real estate market booming, that day may have arrived. The bank needs to find ways to raise money to pay for its acquisitions, such as a stake in Colombian bank that closed on Wednesday, and to meet targets for capital buffers set by regulators.
"In the current low-interest rate environment, it's potentially a good time to sell and we have chosen to explore the sale of Scotia Plaza," DeRabbie said. "We are the only large bank that currently owns our head office in downtown Toronto and given market conditions, this could be an opportune time to maximize the value from our holdings."
Selling real estate to raise cash could help Scotiabank avoid having to part with other, more strategic assets, such as stakes in foreign banks, or selling stock that reduces the stake in the bank held by existing shareholders.
At a Jan. 10 conference, Scotiabank chief executive officer Rick Waugh stressed that the bank has many options for raising capital. "We've had a review of all our significant investments and whatever in other assets," he said. "We've got room there."
The bank has already unloaded one property asset. This month it sold a 50-percent stake in Calgary's Scotia Centre, a 42-storey tower, for $140 million.
Selling more real estate "would be a neat solution, especially considering that there's a general expectation that they will have to raise equity," said Robert Sedran, an analyst who follows Scotiabank at CIBC World Markets.
THE SELLING OF A SKYSCRAPER
Finished in 1988, the 68-storey Scotia Plaza is considered one of the most sought-after addresses in downtown Toronto, at the intersection of King and Bay streets. With an expected price of roughly $1 billion it would beat the previous record sale of an office tower by about $400 million.
Why Scotiabank is selling: With banks now required to hold more capital on their books to backstop operations, many lenders are getting rid of non-essential assets to shore up their capital positions. Rather than issue more shares into the market to build their capital to meet new standards, the bank would rather see what its building would fetch.
To own or to rent: The notion of Canadian banks owning their head offices is a thing of the past. Scotiabank is the last of the large Canadian banks to own its headquarters. Royal Bank of Canada sold its head office in the late 1990s and Canadian Imperial Bank of Commerce offloaded its Toronto headquarters in 2000. Most office towers are owned by pension funds or real-estate investment trusts, and the banks lease space.
Scotia Plaza has been a drag on the bank's operations when vacancy rates were higher. In the late 1990s, Scotiabank lost $5 million a year on empty office space, when as many as eight floors in the building sat empty amid a soft market.
Scotia Plaza's history: The building was originally owned by the Reichmann family's Olympia & York Developments Ltd. But when the real estate giant collapsed in the early 1990s, a group of banks led by Scotiabank acquired mortgage bonds on Scotia Plaza. Over the next several years, the bank began methodically buying up more debt in the tower and by 1998 owned most of it.
Scotia Plaza is a closely watched office property and is considered a bellwether for the real estate market in Canada's financial core. In late 1999, amid slumping demand for office space in Toronto, Scotia Plaza's 12-percent vacancy rate was tracked by analysts looking for signs of a rebound, since it was an indicator of just how low demand had sunk at the time.