Why US hedge funds are not buying investment properties in Vancouver

Hedge funds in the US have raised more than $8 billion to buy properties in the US lately and I am wondering why Canadian hedge funds are not buying properties in Canada like their peers in the US.  

"According to investment bank Jefferies & Co., major financial firms led by Colony,Blackstone Group LP,  Och-Ziff Capital Management and Oaktree Capital Group LLC have raised more than $8 billion to buy houses, largely in markets pummeled by the housing crisis."

http://online.wsj.com/article/SB10000872396390443696604577644700448760254.html

Professional investors make their decisions on real estate investments based on Cap rate (capitalization rate). Cap rate is calculated with this formula:

Operating income of the investment properties (rent minus the expenses like property tax) / price you pay for that investment.

If you paid $250,000 for your investment property, your cap rate is 10% if you receive $25000 in operating income (rent minus all expenses excluding mortgage interest).

Let’s find out what kind of return US hedge funds are getting on their property investment. As per the article from bloomberg.com, US hedge funds estimated they can earn 9% annual yield on their investments. It seems the Cap rate of some US properties can be as high as 9%.

“Sylvan could buy a home for about $50,000 that needs another $50,000 in repairs, such as replacing windows and air conditioning, plumbing and electrical systems, Chang said. The houses will rent for about $1,250 to $1,500 a month, he said…... Based on that cost, investors would get about 9 percent annual yield on their money.”

http://www.bloomberg.com/news/2012-08-01/ex-morgan-stanley-analyst-forms-firm-to-buy-rental-homes.html

What about the Canadian real estate market? Everybody knows the Canadian real estate market is cooling down lately but it outperformed bonds or stocks investments in the past 5,10 years. Smart investors have made lots of money in bricks and mortars, so are the smart guys in hedge funds piling in to take advantage the soft market conditions in real estates? I did a little research on the Cap rate in one of the hottest real estate market in Canada -- Vancouver--- according to vancouvermarket.ca, Cap rates of residential properties in Vancouver are at a multi decade low - 4%

When will we witness the end of declining capitalization rates? Logic would dictate that this trend cannot be sustained; however, with continued low bond yields, debt financing can continue to be characterized as ‘cheap’, and many investors will continue to be attracted to Vancouver’s overall low-risk profile.”

http://www.vancouvermarket.ca/2012/07/13/cap-rate-compression-how-much-longer-can-it-last/

So how safe are investment properties in Vancouver? Let’s say you have paid 20% down on a $250,000 rental property and the cap rate is 4%, you have secured a 5 year mortgage of 3% with 20 year term. For real estate investors in Vancouver, they can earn a net return of 1% above their cost of capital as long as they can secure 3% mortgage rate until the mortgage is paid off in 20 years. So what is your margin of safety in earning a positive return?

Canadian 1 year mortgage rate - data from Bank of Canada:

2011: 3.35% to 3.5%

2010: 3.35% to 3.6%

2009: 3.6% to 5%  

High and low over the last 20 years: 12.25% in 1991 and 3.1% in July 2012

http://www.ratehub.ca/5-year-fixed-mortgage-rate-history

Movement in interest rates are unpredictable, however mortgage rates are at 20 year low right now and the odds of mortgage rates rising might be high over the next 20 years. If your cap rate is 4%, the odds of earning a positive return relative to your cost of capital over the next 10, 20 years might not be good.

What about making a capital gain in your investment properties? Will hedge funds buy properties in Vancouver to take advantage of rising prices in the future? Institutional investors like hedge funds figured: Real estates are long life assets, if the odds of earning a positive return above the cost of capital (mortgage rates) is low, the odds of prices going much higher like the past 10 years might be low as well --- So hedge funds might not buy rental properties in Vancouver, they might go elsewhere looking for opportunities with higher cap rates.

Price is what you pay, Value is what you get. Hedge fund managers might determine the value of properties in the next 10-20 years based on the price they have to pay now, value of investment properties can not be determined by how prices behaved in the past 15 years.