Canadian Pension Funds and CRE
By: Ross Moore, director of research, Canada, CBRE, and Roelof Van Dijk, research manager, Canada, CBRE, with contributions from Jeannette Rice, CBRE’s Americas head of investment research
Limited opportunities in Canada are pushing capital to the U.S., Europe and elsewhere.
WHETHER YOU'RE IN London, New York, Paris or Sydney, odds are a Canadian pension fund is actively scouring your market for investment opportunities. With a strong penchant to own high-quality real estate both inside and, increasingly, outside of their home market, Canada’s pension funds have come to rank among the largest global real estate investors in the world. Why? Limited opportunities in Canada for sizeable investment, and the extent to which Canada’s prime real estate is already owned by Canadian pension fund investors, are pushing the larger funds in particular to expand their portfolios in countries other than Canada.
Six Canadian pension funds now rank in the world’s top 20 for real estate investment, joining such names as Abu Dhabi Investment Authority, Qatar Investment Authority and CalPERS (California Public Employees Retirement System). The Canadian funds now have global platforms that allow them to invest in almost any region of the world. Interestingly, however, much of their foreign investment to date has been with partners. Finding the right joint-venture partner is often the greatest stumbling block for foreign investment.
High-growth economies are particularly attractive, especially when compared to the more mature, lower-growth Canadian economy. While interest is high for real estate opportunities that are tied to high-growth, emerging economies, the lion’s share of investment has occurred in developed countries. Augmenting ownership in both types of economies is development. Canadian pension funds have not been afraid to go the development route, particularly in hard-to-crack markets like Manhattan and London.
Investment in real estate by Canada’s larger pension funds has been accelerating in recent years; the top eight funds deployed $13.5 billion in 2014, up from $5.8 billion just 10 years earlier. (All figures in this article are in U.S. dollars, unless otherwise stated.) Over the same time period, foreign acquisitions went from less than 25 percent of their deployed capital to more than 90 percent of it. Interestingly, in tandem with the increase in foreign investment, Canadian pension funds are also directing substantial capital into new domestic developments, with $1.5 billion invested in construction projects across Canada in 2014.
A review of the past 10 years shows that nearly three-fourths of new pension fund capital from Canada’s larger funds has been deployed outside Canada, with the U.S. and Europe being the clear favorites. The U.S. was the recipient of 31 percent of investment flows from Canada’s eight dominant pension funds, followed by Europe at 27 percent. Within these two regions, most investment was in gateway cities such as New York, Boston, Washington, Chicago, Los Angeles, San Francisco, London and Paris.
Australia/Oceania was a distant third. While much is made of high-growth markets in Asia, Asian investment accounted for little more than 1 percent, demonstrating that Canadian pension funds have very specific criteria when it comes to investing outside their country. Most have very low risk thresholds and always go into foreign markets on a partnership basis. They hold those partners to very high standards. Furthermore, the markets in which they invest must have strong and well-established property rights, transparency and well-functioning capital markets. Exceptions do exist but, by and large, investment by these funds only goes into a handful of gateway cities, is typically urban and is done with well-established local partners that know the market and have the connections that make for successful outcomes.
Property Type Preferences
This approach is also evident when it comes to property type. Office assets are the preferred property type, with all eight pension funds acquiring office properties to varying degrees. The reasons are many. Office is the property type that many pension funds know best, and office properties are valuable enough that significant amounts of capital can be placed efficiently, allowing pension funds to achieve critical mass in just a few markets.
Retail is also a top choice for these funds; all but one acquired retail properties during the past 10 years. Retail is attractive to these funds for similar reasons; most have expertise in retail, and large sums can be invested in a relatively efficient manner. Interest in industrial, apartments and hotels varies by pension fund; in many cases, investment in these sectors is dependent on what opportunities arise. Overall, however, more capital would go into these property types if larger opportunities were available, as they are for office and retail.
The Canada Pension Plan Investment Board (CPPIB), which invests on behalf of its 18 million contributors and beneficiaries, is the largest pension fund in Canada and has made a substantial commitment to growing its real estate portfolio. Between 2005 and May 2015, CPPIB invested $27.2 billion in real estate. As of March 2015, its real estate portfolio exceeded CA$30 billion (about $23 billion). CPPIB has invested broadly, covering all asset classes except hotels. The Caisse de dépôt et placement du Québec, Canada’s second-largest pension fund, has invested $25.9 billion in real estate over the past 10 years, across all asset types. The Ontario Municipal Employees Retirement System (OMERS), representing municipal employees in the province of Ontario, invests through its real estate subsidiary, Oxford Properties. Since 2005, Oxford has invested $12.8 billion across all property types.
As their global investing activity of the past 10 years demonstrates, Canadian pension funds are showing a clear willingness to increase their exposure to real estate. With a largely positive record and a heightened search for yield in a near-zero interest rate world, Canadian pension funds are almost certain to continue their acquisition spree for the foreseeable future. Many of the larger pension funds already have real estate allocations well above 10 percent — the top 10 pension funds are at 12.8 percent — with target rates already at 15 percent, and 15 to 20 percent a near-term possibility. The domestic market is far too small to accommodate what could be an additional CA$90 billion (about $69 billion) in capital, were the entire Canadian pension fund universe to go to 15 percent.
Global investing will therefore be a critical platform for growth. Most of the larger funds have opened satellite offices to facilitate this growth. Along with the valuable experience they have gained over recent years, this positions them well for additional growth. For investors, developers and sellers, the message is clear: there are a number of very active Canada-based global investors who are anxious to place capital in the right deals.
This article is adapted from one that appeared in the June 16, 2015, edition of CBRE’s “About Real Estate.”