GLOBAL ECONOMY

DOWN UNDER’S DOWNTURN

A strong currency, triple-A credit rating and a commodities-heavy economy – Australia looks a lot like us. But as Tavia Grant reports, the country’s cooling growth and Tuesday’s surprise interest-rate cut doesn’t mean Canada will follow suit. PAGE 13

G

S&P/TSX12,464.11 (+10.19)

DOW15,056.20 (+87.31)

S&P 5001,625.96 (+8.46)

DOLLAR99.56 (+0.24)

GOLD1,448.80 (-19.20)

OIL95.62 (-0.54)

GCAN 10-YR1.817% (+0.022)

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Report on Business W E D N E S DAY , M AY 8 , 2 0 1 3 S E C T I O N B

EDITOR: DEREK DeCLOET

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Connect with us: @globebusiness facebook.com/theglobeandmail linkedin.com/company/the-globe-and-mail

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OfficeMax GRAND&TOYIt’s the coming together of experience and expertise, a trusted Canadian brand strategically aligns with its parent

company OfficeMax, a global leader in office solutions. From product and supply chain leadership, to sustainability

best practices, now, more than ever we are committed to meeting the constantly evolving needs of our customers

no matter where they are doing business — whether down the street or coast to coast.

Better together.

WHAT’S IN A NAME? officemaxcanada.com

kjharrison.comDISCIPLINED INVESTING, DEPENDABLE RESULTS

flix’s success by offering populartitles over the Internet for a lowcost.

But that competition has beenslow to materialize in Canada,which has helped Netflix almostdouble its number of subscribershere in the last year.

That’s about to change: Rogers

Canadian television providers areplanning to cut their own cords,with several of the country’s larg-est media companies developingsubscription-based services tocompete with online rivals such

as Netflix Inc.The streaming video service –

which now has close to two mil-lion Canadian subscribers paying$7.99 a month for access – is fac-ing intensifying competition inthe United States by well-fundedcable and technology companiesthat are trying to replicate Net-

Communications Inc. is develop-ing a service that would give sub-scribers access to movies andtelevision shows and is also con-sidering developing televisionseries solely for digital distrib-ution to enhance the product’sappeal.

BROADCASTING

Cable’s channel changer: The fight to be Netflix North . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

STEVE LADURANTAYEMEDIA REPORTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Rogers, Page 12

The Dow at 15,000

Despite another record for the index, investor confidence remains lukewarm.Page 14

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Investing Q&A

John Heinzl takes your questionsin a live chat today at noon (ET).tgam.ca/DqLX

MARKET WATCH

Peter Munk says he’s largely outof the real estate game, but he isputting his money in one surpris-ing spot – Toronto condos.

The 85-year-old founder andchairman of Barrick Gold Corp. –and former head of real estate gi-ant Trizec Properties, which wassold to Brookfield PropertiesCorp. in 2006 for more than$5-billion – is now spending someof his personal wealth on financ-ing condo projects in Canada’smost populous city.

It’s a contrarian move. Policymakers in Ottawa, includingFinance Minister Jim Flaherty andBank of Canada Governor MarkCarney, have suggested that theythink too many condos are beingbuilt in Toronto’s core.

Research firm Urbanation Inc.said Monday that 2,728 new con-dos were sold in the city duringthe first three months of this year,down 29 per cent from the priorquarter and 55 per cent from thefirst quarter of 2012. Some devel-opers have shelved project plansamid the sales downturn, and thenumber of new buildings thatopened in the first quarter of thisyear was the lowest since thethird quarter of 2009. The num-ber of unsold units in projectsthat are going ahead has climbedto 18,845, up 21 per cent from ayear ago.

But Mr. Munk, who believes inToronto’s long-term future, isunfazed.

“That’s the wonderful thingabout the markets; if all of us hadthe same view, we couldn’t affordto buy anything,” Mr. Munk saidin an interview. “It’s wonderful tohave opposing views.”

INVESTING

In Toronto’scrowdedskyline,Peter Munk sees gold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TARA PERKINS REAL ESTATE REPORTER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Condos, Page 12

PAGE 3

MICROSOFTSEARCHESFOR AONE-SIZE-FITS-ALLSOLUTION

WestJet Airlines Ltd. is headingto the runway with an expandedfleet, raising concerns that thesurge in capacity will lead to arenewed industry price war.

The Calgary-based carrier willlaunch its regional subsidiaryWestJet Encore in late June, justas Air Canada introduces its newlow-cost leisure carrier Rougethis summer.

Such extra capacity has thepotential to corrode profit mar-

gins, if airlines are unable to fillthe extra seats or have to slashticket prices to do so.

Analysts pushed the companyon the capacity question during afirst-quarter conference call, inwhich WestJet unveiled recordearnings.

Despite those results, the shareprice of WestJet declined morethan 7 per cent, down $1.85 to$22.87 Tuesday on the TorontoStock Exchange. Air Canada’sstock price also fell sharply, off7.6 per cent.

COMPETITION

Fears of fare war hit airlinesWestJet’s plans to add capacity send shiver through sector – even as record results roll in

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WestJet, Page 12

GUY DIXON TORONTOBRENT JANG VANCOUVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

For someone who says he’snot a real estate guy, PeterMunk has built an extensivecareer in the property market.Here are some of his ventures:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Big return

Mr. Munk’s holding companyacquired real estate firm Tri-zec Corp. for $750-million in1994, followed by an aggres-sive buying spree that in-cluded the purchase ofChicago’s Sears Tower. In 2002,the company renamed itselfTrizec Properties and becamea real estate income trust.Four years later, it was pur-chased for $4.8-billion (U.S.)by Brookfield Properties Corp.and buyout firm BlackstoneGroup. At the time, Trizec’sportfolio included 61 U.S.office towers. Mr. Munk nettedmore than $320-million (Ca-nadian) from the sale.

PETER MUNK’S REAL ESTATE ADVENTURES

Exotic locales

Mr. Munk is no stranger toventures in far-flung locations.He and business partner DavidGilmour built a hotel empirein the South Pacific. In 1981,Mr. Munk and his partnerssold Southern Pacific HotelCorp. for $130-million (U.S.).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The next Monaco

Mr. Munk has a vision for Tiv-at, a coastal town in Montene-gro: He wants to make it thenext Monaco. He and a groupof investors are transformingthe industrial port into a luxu-ry marina/playground for thesuperrich known as PortoMontenegro, where weeklyrates for apartments range be-tween €850 and €10,000($1,100 to $13,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Matt Lundy

B12 G T H E G LO B E A N D M A I L • W E D N E S DAY , M AY 8 , 2 0 1 3• REPORT ON BUSINESS

TORONTO

155 Redpath

A 470-unit residential condomin-ium project located in the Yonge-Eglinton neighbourhood.

Sixty Colborne

A 300-unit residential condomin-ium project, with retail space onthe ground level, located in thehistoric St. Lawrence Market areaadjacent to the downtown busi-ness core.

MONTREAL

Ma Condos

A 150-unit residential condomini-um project located between twogreen spaces 10 minutes fromdowntown Montreal and servedby two Métro stations.

BUCHAREST

Victoria City Centre

A 350,000-square-foot shoppingcentre in northwest Bucharestwith direct subway access; it alsohas 1,900 parking spaces.

HUNGARY & ROMANIA

EuroMiniStorage

2,000-unit, self-storage facilitiesthat CD Capital says have “set thestandard for self-storage in Hun-gary and Romania.”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Source: CD Capital

CD CAPITAL’S PROJECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

“I’m not particularly invest-ing in condo projects, I’m

investing with a man who Ithink is absolutely tops,” headded.

The developer that Mr. Munkis backing is CD Capital, headedby Todd Cowan and JordanDermer. CD Capital’s projects in-clude the 300-unit Sixty Col-borne project near the St.Lawrence Market, which is yetto be built but launched lastyear, and 155 Redpath, near theintersection of Yonge Street andEglinton Avenue, which is justlaunching. CD Capital hasteamed up with Freed Develop-ments and more projects are onthe way. Mr. Munk is one of anumber of wealthy individualsproviding financing for thebuildings.

Mr. Cowan and Mr. Dermerwere both previously executivesat Trizec Properties and went onto be top executives at a jointventure it created, TriGranit De-velopment, whose major share-holders included Mr. Munk andBritish financier Nathaniel Roth-schild. Mr. Cowan became CEOof TriGranit, which developedmore than 10 million squarefeet of properties in Central andEastern Europe from 1997 to2006, when he and Mr. Dermerleft the company and returnedto Canada to start CD Capital.

Mr. Munk declined to say howmuch he has invested in CDCapital buildings. “For me, it’s asignificant amount of money forreal estate,” he said. “I’m notreally a real estate investor.”

“I can’t recall having met ayoung executive with the poten-tial and track record, at his age,of Todd Cowan,” Mr. Munkadded. “When he says condo, Iinvest in condo.”

Mr. Cowan was 28 when hemoved from Canada to Budap-est in 1996 to help get TriGranitoff the ground. The companycontinues to be one of the larg-est fully integrated real estatefirms in Europe. Mr. Cowan,who took a year off when hemoved back to Canada, said heand Mr. Dermer wanted to raisetheir families in this country,and felt that they could put

their experience to use – alongwith the relationships they haddeveloped with people such asMr. Munk and the Rothschilds –to work at home.

“The vision is to turn CD Cap-ital into one of Canada’s great-est developers over the next 10to 20 years,” Mr. Cowan said.

While Toronto condo buildingsare no longer selling out over-night, the market’s long-termprospects are strong, he and Mr.Dermer said. “We think the cityis backed by a very strong rentalmarket and continued inwardmigration,” Mr. Dermer said. Headded that the Yonge and Eglin-ton area, which will be servedby a new light-rail transit line, isripe for development.

But other investors are in-creasingly reluctant to make thebet that Mr. Munk is making.Toronto has more high-rise realestate buildings on the go thanany other city in North Americaand with nearly 60,000 unitsunder construction, activity is ata record high, said Canadian Im-

perial Bank of Commerce econ-omist Benjamin Tal.

He estimates that about 31,000households will form annuallyin the Greater Toronto Areaover the next few years; if that’sthe case, then the projected in-crease in homes in the regionwould suggest overbuilding, hesaid.

Mr. Tal expects that the mar-ket will face its real test in 2014,when as many as 35,000 unitscould be completed, up fromthe average over the past dec-ade of about 15,000. That wouldbe uncharted territory, he said.

However, he expects thatmany projects in the city willwind up being delayed. That’s inpart because “financing isbecoming an issue with the rap-id pace of development causingmany lenders to think twicebefore extending credit.”

He estimates that condo devel-opers are currently facing a$2-billion to $3-billion financinggap, one that’s mainly havingan impact on second-tier playersand luxury condo developers.“The biggest risk that we arefacing is that those investorsthat have been buying condo-miniums, given the fact theywon’t be able to see the sameincrease in rent, maybe theywill bail out,” Mr. Tal said.

For his part, Mr. Munk, a jet-setter who is behind the devel-opment of the world’s largestsuperyacht marina at PortoMontenegro, said he also be-lieves in Toronto’s future.

“Look at Beijing, look at allthe money. I’ve got friends whohave got kids there, tremendousjob opportunities, and the kidswill come back because theycan’t breathe the air,” he said.“You go to London – one of mydaughters lives there, and it’s sooverpriced that it’s sick-making.New York has got tremendousattractions, but it’s also got ahell of a lot of problems. Lookat the traffic – I have an officethere and you can’t go across.

“Toronto is absolutely unique.It’s not flawless, but it’s somuch better than the possiblealternatives …

“I will die here.”

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FROM PAGE 1

Condos: ‘For me, it’s a significant amount of money for real estate’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9

Barrick Gold founder Peter Munk says he believes in Toronto’s future. FERNANDO MORALES/THE GLOBE AND MAIL

The product could competewith similar offerings from

companies such as Bell Mediaand Videotron, which has alreadydeveloped and marketed aFrench-language Netflix alterna-tive available in Quebec and On-tario.

The companies don’t intend toget out of traditional television,which is a key driver of profitswith 12 million Canadian house-holds paying for some level ofservice. But they want to sign upformer subscribers who have opt-ed out of traditional subscriptionpackages while at the same timereinventing themselves for amore digital future.

“It’s my belief that all major[broadcasters] will roll out a Net-flix competitor,” said David Pur-dy, vice-president of digitaltelevision products at Rogers.“It’s a common strategy to tryand figure out how to roll outproducts that allow viewers tobinge watch and to offer all-you-can-eat movie services.”

In the United States, a handfulof companies are looking to stealbusiness from Netflix with theirown offerings. Amazon.com haslaunched a video-streaming serv-ice, joining television and tele-communications powerhousessuch as Comcast and Verizon.There is speculation that as morecompetitors fight to secure rightsto online programming, the priceof such services will increaseexponentially and make it moredifficult for low-cost offeringssuch as Netflix to compete.

“Our underlying fundamentalthesis is there will be more thanone Internet TV competitor,”Evercore analyst Alan Gould said.“Internet TV is growing rapidlyand Netflix is the clear leader inthe market; however, we arehighly skeptical of Netflix reach-ing even the low end of the 60-90million subscribers that manage-ment has projected [worldwide].”

Netflix had no comment.Rogers already offers its cable

subscribers online access tomuch of its programming. But itwants to develop a separate prod-uct that would allow those whodon’t subscribe to its cable pack-age to pay for vast collections ofmovies and archived seasons ofpopular television shows. It couldcompete with Netflix to buy Ca-nadian rights in some cases, orshare rights when Netflix isn’t theexclusive carrier.

Companies such as BCE Inc.,Rogers and Videotron are partic-ularly well suited to launch serv-ices because they also owntelevision stations, making it eas-ier for them to access exclusive

content online.Mr. Purdy spoke about the pro-

ject in the midst of hearings intoBCE’s $3-billion purchase ofAstral Media Inc. Executivesfrom both BCE and Astral arguedto the CRTC that the deal wasnecessary for the companies tocompete with so called “over-the-top” providers such as Netflix.

Cord cutting – in which custom-ers cancel their subscription infavour of online alternatives – isincreasing in Canada, but is stillin its infancy compared to coun-tries such as the United States.But the cable and satellite com-panies are increasingly concernedthat customers will find contentelsewhere, and they want to de-velop their own alternativesbefore customers can walk awayand spend their money with acompetitor.

The companies argue that Ca-nadian companies must be ableto compete, because a portion ofthe money they generate fromsubscribers goes back to Cana-dian productions. BCE has pre-viously said it intended todevelop a Canadian Netflix, butneeds to buy Astral to make ithappen.

“Netflix is just one prominentexample of the kind of scalebeing brought to bear on Cana-da’s industry, challenges to ourbusiness that we believe we mustmeet head-on by expanding ourown scope and scale,” said Astralchief executive officer Ian Green-berg. “That’s what this transac-tion enables.”

FROM PAGE 1

Rogers: Traditional TV a key driver of profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9It’s my belief that all major

[broadcasters] will roll out a

Netflix competitor.

David PurdyRogers’ vice-president of digitaltelevision products

WestJet is stoutly defendingits expansion, with chief ex-

ecutive officer Gregg Saretsky say-ing the economy will be strongenough to support the additionalcapacity. “So we’re putting a littlebit of our foot to the acceleratorbecause of the continued strongmacroeconomic environmentand the results that we’re enjoy-ing,” Mr. Saretsky said during aconference call on its better-than-expected first-quarter results.

He said the airline ran its planestoo full last year, giving up poten-tial customers it could have wonhad there been more capacity.“We’re going to do whatever wecan to bring the right amount ofcapacity to the marketplace, andbe a fierce competitor ourselves.”

Mr. Saretsky said the capacityWestJet is bringing to the marketshould enable the airline to stillgenerate a sustainable 12-per-centreturn on invested capital.

Air Canada and WestJet are ingrowth mode. WestJet’s seat ca-pacity climbed to two billionavailable seat miles (ASMs) lastmonth, up 7.4 per cent from ayear earlier. Air Canada’s year-over-year capacity for April rose 1per cent to 5.3 billion ASMs acrossits system worldwide, with do-mestic ASMs up 3 per cent.

Both airlines have been postingimpressive traffic numbers. West-Jet’s April load factor, or the pro-portion of seats filled by payingcustomers, was 82.7 per cent,while Air Canada enjoyed anApril load factor of 82.1 per cent.

As Montreal-based Air Canada

gears up to attract leisure travel-lers, notably through startingRouge, the extra capacity isexpected to put downward pres-sure on ticket prices. A familiarpattern has emerged in the air-line industry – just as carriersfind a measure of financial healththrough higher ticket prices, theythen aim to increase marketshare by adding seat capacity,effectively driving down airfaresand squeezing already thin mar-gins for operations.

WestJet’s first-quarter profit was$91.1-million or 68 cents a share,compared with $68.3-million or49 cents in the same period a yearago, better than most analystshad expected.

WestJet executives said they be-lieve that the current secondquarter will also be strong, des-pite the added cost of more seatsflown with the new WestJetEncore. But the added capacityhas some observers worriedabout the prospects for furtherstrong results.

“So investors are thinking,‘Well, your load factor is falling,but you’ve got this huge amountof capacity growth. Are you goingto be able to fill that capacityprofitably?’ ” said Robert Koko-nis, president of aviation consult-ing firm AirTrav Inc., who alsosaid the selloff in WestJet stockwas an overreaction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

With files from The Canadian Press. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

WestJet (WJA)Close: $22.87, down $1.85

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WestJet: Fare wars are feared. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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